If you're self-employed, the way you add up your profit changes how much tax you pay and when you pay it. There are two methods: the cash basis and traditional accounting (also called the accruals basis). They can produce very different profit figures from exactly the same business.
Since the 2024/25 tax year, the cash basis has been the default for sole traders. That means HMRC assumes you're using it unless you tick a box to say otherwise. So this isn't a choice you can ignore, it's a choice you're making whether you realise it or not.
This guide explains how each method works, what changed in 2024/25, and how to decide which suits your business for 2026/27. We'll walk through an illustrative example with current figures so you can see the difference in pounds.
What is the cash basis?
The cash basis is the simpler of the two methods. You record income when the money actually lands in your account, and you record an expense when you actually pay it.
So if you invoice a client in March but they pay you in May, that income belongs in the May tax year, not the March one. Likewise, a supplier bill you receive in February but settle in April counts as an April expense.
It's intuitive because it follows your bank statement. You don't have to track who owes you money or what you owe at the year end. For many sole traders, that's exactly how they think about their business already.
According to gov.uk, the cash basis is now the standard way to record income and expenses if you're a sole trader or a partnership without corporate partners.
What is traditional (accruals) accounting?
Traditional accounting, the accruals basis, matches income and costs to the period they relate to, not the period the cash moves.
You record income on the date you invoice it, even if you haven't been paid yet. You record an expense on the date you're billed, even if you haven't paid it yet. At your year end you also account for things like stock, debtors (money owed to you) and creditors (money you owe).
It gives a more complete picture of how the business is performing, which is why it's the standard for limited companies and why lenders often prefer it. The trade-off is more record-keeping.
What changed for the cash basis in 2024/25?
The 2024/25 tax year brought the biggest shake-up to the cash basis since it was introduced. Four things changed, and they all made the cash basis more attractive.
It became the default. From 2024/25 onwards, the cash basis is the default method for sole traders and most partnerships. If you want traditional accounting instead, you have to opt out by ticking the relevant box on your Self Assessment return. Before, it was the other way round: you had to opt in.
The turnover limits were scrapped. Previously you could only join the cash basis if your turnover was under £150,000, and you had to leave once it passed £300,000. Both of those thresholds have gone, so any eligible sole trader can use it regardless of size.
The £500 interest cap was removed. Under the old rules, the cash basis limited the business loan and finance interest you could deduct to £500 a year. That cap has gone, so you can now deduct allowable business finance costs in full, just as you can under traditional accounting.
Loss relief was widened. Cash basis losses used to be stuck: you could only carry them forward against future profits of the same trade. Now they get the same flexible treatment as accruals losses, so you can set a loss against your other income in the same year or the previous year, subject to the usual rules.
In short, most of the old reasons to avoid the cash basis have disappeared.
Cash basis vs accruals: a side-by-side comparison
| Feature | Cash basis | Traditional (accruals) accounting |
|---|---|---|
| When income is counted | When you receive the money | When you raise the invoice |
| When an expense is counted | When you pay it | When you're billed |
| Stock, debtors and creditors at year end | Ignored | Must be accounted for |
| Record-keeping effort | Lower | Higher |
| Default for sole traders (2024/25 onwards) | Yes | No, you must opt out |
| Turnover limit to use it | None (from 2024/25) | None |
| Business finance interest | Fully deductible (from 2024/25) | Fully deductible |
| Loss relief | Flexible (from 2024/25) | Flexible |
| Suits | Simple, service-based, paid-quickly businesses | Stock-heavy businesses, those seeking finance |
Illustrative example: the same year, two methods
Here's how the choice plays out in practice. The names and figures below are an illustrative example, not a real client.
Illustrative example. Priya is a self-employed graphic designer. In 2026/27 she does the following:
- Receives £44,000 from clients during the year.
- Raises a further £6,000 of invoices in March 2027 that clients don't pay until April 2027.
- Pays £4,000 of business expenses during the year.
- Has no other income and isn't in Scotland.
Under the cash basis, Priya counts only the £44,000 she actually received, less the £4,000 she paid. Her taxable profit is £40,000. The £6,000 invoiced in March but paid in April falls into the next tax year.
Under traditional accounting, she counts the full £50,000 she invoiced (£44,000 plus £6,000), less the £4,000 paid. Her taxable profit is £46,000, because the £6,000 is earned in 2026/27 even though the cash arrives later.
Now let's tax those profits. For 2026/27 the Personal Allowance is £12,570 and the basic Income Tax rate is 20%. Sole traders also pay Class 4 National Insurance at 6% on profits between the Lower Profits Limit of £12,570 and the Upper Profits Limit of £50,270.
| Step | Cash basis (£40,000 profit) | Accruals (£46,000 profit) |
|---|---|---|
| Profit | £40,000 | £46,000 |
| Less Personal Allowance | £12,570 | £12,570 |
| Taxable at 20% | £27,430 | £33,430 |
| Income Tax (20%) | £5,486 | £6,686 |
| Class 4 NIC (6% above £12,570) | £1,645.80 | £2,005.80 |
| Total tax and NIC | £7,131.80 | £8,691.80 |
On these figures the cash basis defers around £1,560 of tax and NIC into the following year, because the £6,000 of late-paid invoices is taxed a year later.
The key word is defer. The cash basis doesn't make that £6,000 tax-free. Priya will pay tax on it in 2027/28 when the cash arrives. The benefit is timing, not a permanent saving. If her invoicing and payment patterns are steady year on year, the difference largely evens out over time.
Want to see your own numbers? Try our self-employed tax calculator to estimate the tax on a given profit figure.
Who cannot use the cash basis?
The cash basis is open to most sole traders, but not everyone. Per gov.uk, it cannot be used by:
- Limited companies and limited liability partnerships.
- Partnerships that have a company as a partner.
- Lloyd's underwriters.
- Farming businesses with a current herd basis election, or any business using profit averaging.
- Businesses that have claimed business premises renovation allowance in the previous seven years.
- Mineral extraction businesses, and any business that has claimed research and development allowance.
A handful of other specialist trades may find traditional accounting works better because it gives access to reliefs the cash basis doesn't. If you're a straightforward service business, none of this is likely to affect you.
How do I choose the right method for 2026/27?
There's no universally correct answer, only the right answer for your business. Use these steps.
- Check you're eligible. If you're a sole trader running a simple business, you almost certainly are. If you're caught by one of the exclusions above, traditional accounting is your route.
- Look at how you get paid. If clients pay you quickly and you carry little or no stock, the cash basis is usually simpler and rarely costs you anything. If you invoice large amounts well before you're paid, the cash basis can genuinely help your cash flow by deferring tax.
- Think about stock. If you buy and hold significant stock, traditional accounting often gives a fairer profit figure, because it matches the cost of goods to the sales they generate.
- Consider finance applications. Lenders and mortgage providers frequently want accounts prepared on the accruals basis. If you're planning to borrow, factor that in.
- Watch the year of transition. Switching between methods can bring one-off adjustments so income and expenses aren't counted twice or missed. If you're thinking of moving from one to the other, get it checked.
In practice, the mistake we most often see is a sole trader assuming they must keep doing what they've always done. Since 2024/25 the default has flipped, so it's worth a deliberate decision rather than drifting. If you'd like a second pair of eyes, our self-assessment service and bookkeeping support are built for exactly this.
How does Making Tax Digital affect this?
Making Tax Digital for Income Tax (MTD for Income Tax) is a separate change, but it's worth knowing about because it lands at the same time you're making this decision.
From 6 April 2026, sole traders and landlords with qualifying income over £50,000 (based on their 2024/25 return) must keep digital records and send quarterly updates to HMRC using compatible software, per gov.uk. The threshold drops to £30,000 from April 2027 and £20,000 from April 2028.
MTD doesn't change whether you use the cash basis or accruals. You can use either under MTD. But it does mean cleaner, more consistent record-keeping matters more than ever, which is another reason to settle on the right method now.
Frequently asked questions
Is the cash basis or accruals better for a sole trader?
For most simple, service-based sole traders who get paid reasonably quickly, the cash basis is simpler and rarely costs more tax overall. Traditional accounting tends to suit businesses with significant stock, or those who need accruals-based accounts to apply for finance. The best method depends on your specific business, not a blanket rule.
Is the cash basis the default for sole traders in 2026/27?
Yes. Since the 2024/25 tax year, the cash basis has been the default for sole traders and most partnerships. If you want to use traditional accounting instead, you have to opt out by ticking the relevant box on your Self Assessment tax return.
Does the cash basis save me tax?
Usually it defers tax rather than saving it. By counting income only when you're paid, the cash basis can push tax on late-paid invoices into a later year, which helps cash flow. The income is still taxed eventually, so over several steady years the difference tends to even out.
Can I switch between the cash basis and traditional accounting?
Yes, you can change method, but you can't count the same income or expense twice or miss it altogether in the year you switch. Transitional adjustments apply. It's worth getting the change checked so the year of transition is handled correctly.
Is there still a turnover limit for using the cash basis?
No. The old £150,000 entry threshold and £300,000 exit threshold were both removed from the 2024/25 tax year. Any eligible sole trader can now use the cash basis regardless of turnover.
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Ready to pick the right method?
Choosing between the cash basis and traditional accounting is one of those decisions that's quick to make and expensive to get wrong. If you'd like a UK accountant to look at your numbers and recommend the right approach for your business, book a free call with Zmartly. We work with sole traders every day and can handle the filing too.
