Guides

Cash basis or accruals: which should a sole trader use?

Checked against GOV.UK on 15 October 2026

General guidance taken from GOV.UK, not advice about your own tax affairs. HMRC's rules change, so the GOV.UK pages listed at the end are the final word.

Since 6 April 2024, cash basis is the default way for a sole trader to work out their profit. You record income when the money arrives and expenses when you pay them. The alternative, traditional accounting, records them by the date you invoiced or were billed. That is accruals accounting: GOV.UK's Making Tax Digital guide talks about adjusting for "accruals" under traditional accounting.

Cash basis

  • Only record income you've actually received. Money you're owed but haven't been paid doesn't count yet, so you don't pay Income Tax on it.
  • Only record expenses you've actually paid.
  • Every form of payment counts — cash, card, cheque, payment in kind.
  • Pick one way of dating a payment and keep it. For example, the day the money reaches your account, or the day a cheque is written — but the same method on every tax return.

GOV.UK's example: you invoice on 15 March 2024 and are paid on 30 April 2024. You record the income on 30 April 2024.

What else changes:

  • Equipment you buy and keep for the business — machinery, computers, vans — is an ordinary allowable expense, not a capital allowance. Cars are the exception: claim them as a capital allowance, unless you use simplified expenses for that vehicle.
  • Bad debts can't be claimed, because unpaid invoices were never recorded as income.
  • If you're VAT registered, you can record income and expenses including or excluding VAT, but must treat both the same way. If you include it, VAT you pay to HMRC is an expense and VAT repayments are income.

Traditional accounting (accruals)

You record income and expenses by the date of the invoice or bill. GOV.UK suggests you might choose it if your business:

  • is complex — for example, it holds a lot of stock
  • needs finance — a bank may want accounts drawn up this way to see what you owe and are owed before agreeing a loan

It means keeping more records. You say on your Self Assessment tax return that you've used it, and you may need to make adjustments when you switch.

Under Making Tax Digital, your software lets you adjust the year's totals for prepayments and accruals. GOV.UK's examples:

  • A prepayment: £1,200 paid in January for a 12-month insurance policy. Spread over the policy, £300 belongs to the first tax year and £900 to the next.
  • An accrual: a consultant's work done in March 2026 that hasn't been invoiced yet. You record the cost in the 2025 to 2026 tax year, when it was incurred.

You don't need to make these adjustments if you use cash basis.

Who cannot use cash basis

You must use traditional accounting if your business is a:

  • limited company
  • limited liability partnership
  • partnership with one or more corporate partners

or if you're a:

  • Lloyd's underwriter
  • farming business with a current herd basis election
  • farming or creative business with a fluctuating profit averaging claim
  • business that has claimed business premises renovation allowance in the previous 7 years
  • business that carries on a mineral extraction trade
  • business that has ever claimed research and development allowance

Some special rules — for example for dealing in securities, or for a minister of religion — are only available under traditional accounting, so a business they apply to may prefer it.

More than one business

You can choose cash basis or traditional accounting separately for each business.

Before the 2024 to 2025 tax year, you could only use cash basis with a turnover of £150,000 or less. It's the default now.

Sources