Cash basis vs accruals for landlords under MTD

Making Tax Digital for Income Tax is here, and a question we get asked more than almost any other is a deceptively simple one: should I keep my rental records on the cash basis or the accruals basis?

It matters more than ever now. From 6 April 2026, the first wave of landlords has to keep digital records and send HMRC quarterly updates, so the way you recognise rent and expenses feeds straight into figures you'll report four times a year.

The good news is that for most individual landlords the answer is already set by default, and switching is a deliberate choice rather than something you stumble into. This guide explains what each basis means, which one HMRC treats as your starting point, how it interacts with your MTD quarterly updates, and how to decide.

It's written for unincorporated landlords (individuals and partnerships) who let UK or foreign property. If you hold property through a company, the rules are different and we flag that below.

What's the difference between cash basis and accruals?

In one line: the cash basis records money when it actually moves, while the accruals basis records income and costs when they're earned or incurred, regardless of when cash changes hands.

Under the cash basis, you count the rent you've actually received in the tax year, and you deduct the expenses you've actually paid in that year. If a tenant pays March's rent in April, it falls into the later year. If you pay for a repair in March but the invoice is dated February, it lands in the month you paid.

Under the accruals basis (HMRC calls this "traditional accounting", and it follows generally accepted accounting practice), you record rent in the period it relates to and expenses in the period they relate to, even if the cash hasn't moved yet. So rent due in March is taxed in that tax year even if it arrives in April, and a repair invoiced in March is deducted in March even if you settle it later.

The practical effect is mostly about timing. Over the life of a rental business the two methods tend to even out, but in any single year they can produce quite different profit figures, and that's exactly the figure MTD asks you to summarise each quarter.

Which basis is the default for landlords?

For most unincorporated property businesses, the cash basis is the default. You don't have to elect into it. If you do nothing, you're on it.

HMRC's Property Income Manual is explicit: since the 2017/18 tax year, the cash basis "has been the default basis for most property businesses" run by individuals or partnerships, where the eligibility conditions are met. The accruals basis is the one you have to actively choose.

That's the opposite of how many landlords assume it works. People expect "proper accounting" to be the starting point and the simpler method to be something you opt into. For property, it's the other way round.

To use the accruals basis instead, an eligible individual elects to use generally accepted accounting practice. In practice, that's done by ticking the box on your tax return (in MTD terms, in your final declaration) to confirm you're not using the cash basis. The election has to be made within one year of the filing date for that tax year.

One quick but important contrast worth knowing: for sole-trader trades the £150,000 cash basis turnover cap was removed and the cash basis became the default from 2024/25. For property businesses the £150,000 limit still applies. So if you run both a trade and a let, the two parts of your tax affairs can follow slightly different cash basis rules. We come back to that below.

Can every landlord use the cash basis?

No. The cash basis is the default for eligible landlords, but several situations push you onto the accruals basis instead. According to HMRC's Property Income Manual, you cannot use the cash basis for a property business if any of these apply:

• The business is run by a company, a limited liability partnership (LLP), a trustee, or a partnership with a corporate (non-individual) partner. The cash basis is for individuals and ordinary partnerships only.
• Your property receipts for the tax year exceed £150,000 (the threshold is reduced proportionately if you only let for part of the year). Above that, traditional accounting is required.
• You're electing to use accruals (GAAP) for that business, as covered above.
• There's a business premises renovation allowance balancing adjustment in play.
• For jointly let property between spouses or civil partners, both must use the same basis.

If you hold property through a limited company, none of the cash basis rules above apply to you. Companies prepare accounts on the accruals basis and are outside MTD for Income Tax entirely (MTD for Income Tax applies to individuals and certain partnerships, not companies). For the wider picture on running property through a company, our guide for landlords walks through the trade-offs.

It's also worth remembering how HMRC slices up a property portfolio. All your UK property is treated as a single UK property business. Any overseas property is a separate foreign property business. You can choose the basis separately for each, so it's entirely possible to be on the cash basis for your UK lets and the accruals basis for an overseas one, or the reverse.

How does your basis affect MTD quarterly updates?

Under Making Tax Digital for Income Tax you keep digital records and send HMRC a quarterly update for each business: one for your UK property business, a separate one for any foreign property, and another for any self-employment.

Two features of these updates matter for the cash-versus-accruals question.

First, quarterly updates are cumulative. HMRC's guidance states that each update "will cover from the start of the tax year to the end of the update period, not just the previous three months." So you're sending a running year-to-date total of income and expenses, not four separate mini returns. They're summary figures, not a tax calculation, and you don't pay tax off the back of them.

Second, your accounting basis decides what goes into each total. On the cash basis, an update includes the rent banked and the costs paid up to that quarter end. On the accruals basis, it includes rent earned and costs incurred up to that date, even where cash hasn't moved. Same property, same period, potentially different numbers in the box.

The standard quarterly update periods and deadlines for 2026/27 are:

Because updates are cumulative, a late tenant payment or an unpaid invoice doesn't strand you. On the cash basis it simply lands in whichever quarter the money actually moves. On the accruals basis, it's already counted when it was due, and any later adjustment flows through the year-to-date figure.

After the fourth update you make a final declaration, due by 31 January following the end of the tax year. That's the point where the year is finalised, reliefs are claimed and other income is brought in, and it's what produces your Self Assessment tax bill. HMRC pre-populates employment (PAYE) and pension figures, and you add the rest, things like dividends, savings interest and partnership profits, before submitting. Your payment dates don't change: balancing payment by 31 January and payments on account on 31 January and 31 July.

Worked example: the same year on each basis

Illustrative example. Priya is an individual landlord with a single UK rental flat. She's well inside the £150,000 receipts limit, so she's eligible for either basis. Here's how one tax year (2026/27) looks under each, using the same underlying facts.

The facts:

• Monthly rent is £1,200. Her tenant pays every month on time except March 2027's rent, which arrives on 8 April 2027 (the next tax year).
• She pays a £900 boiler repair, invoiced 20 March 2027, but settles it on 12 April 2027.
• All other allowable costs in the year total £2,400 and are both incurred and paid within 2026/27.

Cash basis. She counts the rent received in the year. Eleven months arrive on time (£1,200 x 11 = £13,200); March's rent arrives in the next tax year, so it's excluded. The £900 repair is paid in April, so it's excluded too.

• Rent received: £13,200
• Expenses paid: £2,400
• Taxable profit: £13,200 - £2,400 = £10,800

Accruals basis. She counts the rent due for the year, all twelve months (£1,200 x 12 = £14,400), because March's rent relates to the year even though it's paid late. The £900 repair is incurred in March, so it's deducted in this year.

• Rent earned: £14,400
• Expenses incurred: £2,400 + £900 = £3,300
• Taxable profit: £14,400 - £3,300 = £11,100

In this single year the cash basis shows £300 less profit, so a little less tax now. But the difference is purely timing. The late rent and the repair both land in 2027/28 on the cash basis, so over the two years the totals converge. The point isn't that one basis is "cheaper", it's that each spreads the same income and costs across years differently, and that pattern shows up in your cumulative quarterly figures.

If you want to sense-check the tax effect of a profit figure, our self-employed tax calculator gives a quick estimate of Income Tax and National Insurance on a given level of profit (rental profit isn't subject to Class 4 NIC, so treat the NIC line as a trade-only figure and read across the Income Tax result).

How do you choose, and how do you switch?

For most small landlords the cash basis is the sensible default, which is convenient because it's also the actual default. It's simpler to keep, it matches the money in and out of your account, and it gives a cash flow cushion when a tenant falls into arrears, because you're only taxed on rent you've genuinely received.

The accruals basis tends to suit you better when:

• You want profit to reflect the period it relates to (useful if income or costs are lumpy across a year end).
• You have significant timing differences, large invoices straddling the tax year, or rent regularly paid in a different year from when it's due.
• Your bookkeeping is already on an accruals footing, or your accountant prepares fuller accounts for other reasons.

A short decision walkthrough:

1. Are you a company, LLP, trustee or a partnership with a corporate partner? If yes, you're on accruals, decision made.
2. Are your property receipts over £150,000 for the year? If yes, accruals is required.
3. If neither applies, do you have a specific reason to prefer accruals (timing, lumpy costs, existing accounting practice)? If yes, elect for it. If no, the cash basis default is usually the right call.

To move to the accruals basis you make the GAAP election, in practice by indicating on your return or final declaration that you're not using the cash basis, within one year of the filing date for that tax year. To move back to the cash basis later, you simply stop making that election for a year you're eligible. When you do switch, there are transitional adjustment rules so that income and expenses aren't counted twice or missed in the changeover year, which is exactly the kind of thing worth getting a second pair of eyes on.

Does my basis change who has to join MTD?

No, and this catches people out, so it's worth being clear.

Whether you have to use MTD for Income Tax depends on your qualifying income, and qualifying income is measured on a gross basis. HMRC's guidance defines it as "gross income (income before you deduct expenses, also called your turnover)". It adds together your gross self-employment turnover and your gross property income, and HMRC works it out from the Self Assessment tax return you submitted in the previous tax year.

Because it's gross, your choice of cash basis or accruals doesn't change the headline figure HMRC tests you against. Employment and pension income don't count toward the threshold either, though they are reported later at the final declaration stage. Your share of jointly let property and foreign property reported on your UK return are included; dividends, savings interest, and the State and private pension are not.

The thresholds and start dates are:

So a landlord with £55,000 of gross rents is in scope from April 2026 whether they're on cash basis or accruals, even if expenses bring their actual profit well below that.

On penalties, HMRC is running a points-based late submission system. You get a point for each missed deadline, and once you reach a threshold of 4 points you receive a £200 penalty, with a further £200 for each later default while you're at the threshold. There are no penalties for late quarterly updates in the first year (2026/27) while everyone adjusts, but the updates still have to be sent. Late payment penalties are separate and charged as a percentage of the tax outstanding.

MTD for landlords: key dates at a glance

This calendar assumes a landlord first mandated from 6 April 2026 (gross qualifying income over £50,000), reporting one UK property business for the 2026/27 tax year.

Keep records digitally throughout, and remember the digital links rule: there must be a digital link between the software you use, with no manual copy-and-paste of figures between programs. If you keep records in a spreadsheet, you'll need bridging software to connect it to HMRC. We won't name specific products here, because the right choice depends on the live HMRC list of compatible software, which is the place to check before you commit.

If you'd rather hand the quarterly rhythm to someone else, this is bread-and-butter work for us. Zmartly sets landlords up on compliant software, keeps the digital records, files the quarterly updates and handles the final declaration, so the deadlines above become our problem, not yours. Want help getting MTD-ready for your rental income? Talk to a Zmartly accountant about our landlord support.

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