If you're a sole trader or in a partnership, how you record your income and expenses changes when you pay tax, and how much admin you carry. Cash basis accounting is the simpler of the two options, and since April 2024 it's the default for most unincorporated businesses.
This guide explains what the cash basis is, how it differs from traditional accrual accounting, and what the 2024 reforms changed. We'll work through a clear example, show who can use it, and help you decide whether it's right for you.
It's written for sole traders, freelancers, contractors and small partnerships. If you run a limited company, the cash basis isn't an option for you, and we'll explain why.
How does cash basis accounting work?
Cash basis accounting is a straightforward way of recording your business finances. You count income only when you actually receive payment, and you count an expense only when you actually pay it.
Think of it like your personal current account. Money matters when it lands or leaves, not when someone promises to pay you or when a bill arrives.
That simplicity is why the cash basis suits a lot of smaller businesses and sole traders. There are no accruals, prepayments or provisions to wrestle with.
How recording works in practice
When a customer pays you, that's when the income appears in your accounts. When you pay a supplier, that's when the expense is recorded. The date on the invoice doesn't drive anything; the date the money moves does.
This timing has a real effect on your tax bill. You won't pay tax on an invoice until the customer has actually paid it, which can help your cash flow.
A simple cash basis example
Illustrative example. Say you're a freelance graphic designer. You invoice a client £2,000 on 31 March 2025, which falls in the 2024/25 tax year. The client doesn't pay until May 2025, which is in the 2025/26 tax year.
Under the cash basis, you record the £2,000 in 2025/26, the year you received the money. You'd report it on your 2025/26 tax return, due by 31 January 2027.
Under accrual accounting, you'd instead record it in 2024/25, the year you raised the invoice, and pay tax on it sooner, even though the cash hadn't arrived.
What changed with the cash basis in April 2024?
The 2024/25 tax year brought the biggest reform to the cash basis since it was introduced. The changes were announced at Autumn Statement 2023 and took effect from 6 April 2024. They first apply on the 2024/25 return, which was due by 31 January 2026.
A lot of older guidance still quotes the previous rules, so it's worth being clear about what actually changed.
Turnover thresholds removed
The biggest change is that the turnover limits have gone. Before April 2024 you could only join the cash basis if turnover was under £150,000, and you had to leave it once turnover hit £300,000.
From 6 April 2024 there are no turnover restrictions. Eligible sole traders and partnerships of any size can use the cash basis and keep using it as they grow.
Unlimited interest deductions
The old £500-a-year cap on interest deductions has been removed. You can now deduct any amount of interest on business borrowings, as long as it's incurred wholly and exclusively for the trade. That brings the cash basis into line with accrual accounting on interest.
Full loss relief
Cash basis losses can now be relieved in the same ways as accrual losses, subject to the normal rules. You can set a loss sideways against your other general income of the same period, or carry it back to earlier years. This removed a real disadvantage that used to push some businesses towards accrual accounting.
It's now the default method
By making the cash basis the default, the government formalised what many small businesses already did informally. If you're eligible and don't actively elect for accrual accounting, the cash basis applies automatically.
What is traditional accrual accounting?
Traditional accrual accounting, sometimes called the accruals basis, works the other way round. You record income and expenses when they're earned or incurred, not when the money moves.
So you account for a sale when you issue the invoice, and for a cost when you receive the bill, whether or not anyone has been paid yet.
This gives a fuller picture of where the business stands at any moment. It shows what you're owed and what you owe, not just what's sitting in the bank.
What records does accrual accounting need?
The accruals basis needs more detailed records, typically including:
- All business assets you buy, including stock and equipment
- The value of your stock at the end of each accounting period
- Money owed to you (debtors) and money you owe (creditors)
- Payments to employees, such as wages and benefits
- Business vehicle and travel costs
That detail gives you better insight into performance, but it takes more administrative effort.
What are the key differences between cash and accrual accounting?
The table below summarises the practical differences. It reflects the position for 2025/26.
| Feature | Cash basis | Accrual basis |
|---|---|---|
| Income recorded when | Payment is received | Invoice is issued |
| Expense recorded when | Payment is made | Bill is received or obligation arises |
| Most equipment (not cars) | Deducted in full when paid | Usually claimed via capital allowances |
| Interest on borrowings | Fully allowable (no cap since Apr 2024) | Fully allowable |
| Loss relief | Full options since Apr 2024 | Full options |
| Stock and work in progress | No formal closing-stock adjustment | Opening and closing stock valued and adjusted |
A few of these deserve a closer look.
How is equipment treated?
Under the cash basis, the cost of most equipment is an allowable expense in the year you pay for it. There's no need to spread relief over several years through capital allowances. Cars are the main exception, and still go through capital allowances.
Under the accruals basis, equipment is normally treated as a capital asset and relieved through capital allowances, often using the Annual Investment Allowance of £1,000,000.
What about stock?
This is still a genuine difference. The accruals basis values opening and closing stock and adjusts your profit for the change. The cash basis doesn't, which keeps things simple but is less suited to stock-heavy businesses.
What are the advantages of cash basis accounting?
The cash basis suits a lot of smaller businesses, and the 2024 reforms strengthened the case.
- It's simpler. You track money in and money out. There are no accruals, prepayments or provisions to learn.
- It can help cash flow. You pay tax once a customer has actually paid you, not on invoices that are still outstanding.
- Less admin. No detailed stock valuations, work-in-progress figures or depreciation schedules to maintain.
- Quicker relief on equipment. Most equipment (cars aside) is deducted in full when you pay for it.
- Easier reconciliation. Your records track the same money movements as your bank statements.
- No turnover ceiling since 2024. Eligible businesses of any size can use it.
- Full interest relief since 2024. Interest on a genuine business loan is fully deductible.
- Full loss relief since 2024. Losses can be set sideways or carried back, subject to the usual rules.
If you'd like a hand weighing these up, our self-assessment service can review your figures and tell you which basis leaves you better off.
Who can use cash basis accounting in the UK?
Eligibility depends on your business structure, not your turnover.
Who can use it
- Sole traders
- Partnerships where every partner is an individual
That covers most consultants, freelancers, tradespeople and other unincorporated businesses.
Who cannot use it
- Limited companies
- Limited liability partnerships (LLPs)
- Partnerships where any partner is a company or LLP
These must use accrual accounting.
No turnover restrictions
Since the 2024 reforms there are no turnover limits. The old £150,000 entry threshold and £300,000 exit threshold are gone. A sole trader turning over £50,000 and one turning over £500,000 can both use the cash basis, provided they meet the structure rules.
When it might not suit you
Even if you're eligible, the cash basis may not be the best fit if you hold significant stock or work in progress, need detailed accrual-based accounts for a lender or investor, or are planning to incorporate soon. If you run a limited company already, the question doesn't arise, as accrual accounting is mandatory.
When should you use accrual accounting instead?
Despite the cash basis being simpler, accrual accounting is sometimes the better or the only choice.
- You're a limited company or LLP. You have no choice; the cash basis isn't available and you must follow company-law accounting rules.
- You hold significant stock. Retailers and wholesalers usually need proper stock valuations to see true gross profit.
- You need detailed management information. Accrual accounts show what you're owed and what you owe, which matters when you're raising finance.
- You're planning to incorporate. Building records on the accruals basis can make the transition to a company smoother.
- A lender or investor requires it. External stakeholders may insist on accrual-based accounts regardless of tax simplicity.
How do you switch between accounting methods?
You're not locked into your first choice. You can move between the two bases, but there are a couple of things to get right.
Switching from cash to accrual
You can switch to accrual accounting voluntarily at any time. Common reasons include business growth, preparing to incorporate, or a lender wanting accrual-based accounts. Since 2024 there's no longer a forced switch when turnover passes a threshold.
Switching from accrual to cash
You can move to the cash basis if you're eligible. Because the cash basis became the default in April 2024, many sole traders are on it automatically unless they elected for accrual accounting.
Transition adjustments
Switching needs adjustments so income and expenses aren't counted twice or missed. Moving from cash to accrual means picking up unpaid invoices you hadn't recorded; moving the other way means adjusting for items already recorded but not yet paid. These adjustments affect your taxable profit in the year of change.
You confirm which basis you're using on your Self Assessment return. Getting the transition right is fiddly, and it's a sensible point to get an accountant involved.
Want help choosing the right basis?
Picking between cash and accrual accounting comes down to your structure, your stock, your borrowing and your plans. Zmartly can review your situation, recommend the basis that leaves you better off, and handle any transition adjustments and your return. Book a free 20-minute call with a Zmartly accountant at zmartly.co.uk/contact.
Frequently asked questions
What is cash basis accounting?
Cash basis accounting is a method where you record income only when you actually receive payment, and expenses only when you actually pay them. It tracks money in and money out rather than invoices and bills. Since 6 April 2024 it has been the default method for eligible sole traders and partnerships, with no turnover limits.
What is the difference between cash basis and accrual accounting?
The cash basis records income and expenses when money changes hands. Accrual accounting records them when an invoice is issued or a bill is received, regardless of payment. Accrual accounting gives a fuller picture of what you're owed and what you owe, but it needs more detailed records, including stock valuations.
Is there a turnover limit for cash basis accounting?
No. The turnover thresholds were removed from 6 April 2024. Before then you needed turnover under £150,000 to join and had to leave at £300,000. There are now no turnover limits, so an eligible sole trader or partnership of any size can use the cash basis.
Can a limited company use the cash basis?
No. The cash basis is only available to sole traders and partnerships where all partners are individuals. Limited companies and limited liability partnerships must use traditional accrual accounting.
Can I switch between cash basis and accrual accounting?
Yes. You can move from cash to accrual voluntarily at any time, and from accrual to cash if you're eligible. Switching needs transition adjustments so income and expenses aren't double-counted or missed, and these affect your taxable profit in the year you change.
Are there interest limits under the cash basis?
No, not since April 2024. The previous £500-a-year cap on interest deductions was removed from 6 April 2024. You can now deduct any amount of interest on business borrowings, provided it's incurred wholly and exclusively for the trade.
