Money in, money out. The simplest way to keep self-employed accounts — and, since April 2024, the default option for sole traders.
There are two honest ways to answer the question "how much did I make this year?" One counts the cash that actually moved. The other counts the work you actually did, paid for or not. Cash basis accounting is the first kind, and for the majority of UK sole traders it is now not just allowed but the default — a quiet but significant shift that took effect in April 2024.
The rule is as plain as it sounds: a transaction only hits your accounts when the money does. If you invoice a client £2,000 on 20 March 2026 but they do not pay until 12 April 2026, that income belongs to the 2026/27 tax year, not 2025/26 — because that is when the cash arrived. The same logic applies to costs: a tool you buy on credit only counts as an expense when you settle the bill.
This makes record-keeping intuitive: your accounts essentially follow your bank statement. There is no need to track debtors (money owed to you) or creditors (money you owe) for tax purposes, which is exactly why HMRC pushed it as the simpler standard.
For years, cash basis was an opt-in scheme with a turnover threshold: you could join below a certain level of income and had to leave once you grew past it. From the 2024/25 tax year, the government flipped the default. Now sole traders and partnerships are on cash basis automatically, the entry and exit turnover limits have been removed, and you must positively elect for the accruals basis if you want it. Restrictions that used to make cash basis less attractive — tight limits on interest deductions and on using losses — were also relaxed as part of the same package.
Nadia is a freelance copywriter. In March 2026 she finishes a £6,000 project and invoices on 28 March, but the client pays on 15 April 2026. She also pays £400 for software on 2 April 2026 for the year ahead.
| Item | Cash basis (2025/26) | Accruals basis (2025/26) |
|---|---|---|
| £6,000 invoice (paid Apr 2026) | Not counted | Counted as income |
| £400 software (paid Apr 2026) | Not counted | Apportioned if relevant |
| Effect on 2025/26 profit | £6,000 lower | £6,000 higher |
On the cash basis, that £6,000 falls into 2025/26's next year, so Nadia's 2025/26 taxable profit is lower and her tax is deferred a year. On the accruals basis, the income is recognised when the work was done, raising this year's profit. Neither is "more correct" overall — but cash basis is simpler and can smooth cash flow. Model your own numbers with the sole trader tax calculator.
Cash basis shines for straightforward service businesses: consultants, tradespeople, tutors, designers — anyone whose accounts are essentially "fees in, costs out" with little stock. It is harder to argue for if you hold significant inventory, manufacture goods, or carry large amounts of business borrowing, because the timing of cash can badly misrepresent how the business is genuinely performing. In those cases the accruals basis usually gives a truer figure. Limited companies cannot use cash basis at all; they must prepare accounts on the accruals basis under company law.
From April 2026, sole traders with qualifying income over £50,000 move to Making Tax Digital for Income Tax, submitting quarterly summaries from digital records. Cash basis dovetails neatly with this: because you record transactions when money moves, your quarterly figures fall out of your bank data with minimal adjustment, which is one reason HMRC favoured making it the default ahead of the MTD rollout.
Cash basis follows your bank account, not your invoices. For most one-person businesses that is exactly the simplicity they need — and now it is the option you get unless you ask for something else.
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