Updated on 6 April 2025

Accounts: cash basis

Sole traders and partnerships must prepare business accounts to show the income and expenses of the business for the period covered by the accounts. There are two ways to prepare business accounts- the cash basis which is designed to be a simpler way of preparing accounts, or the accruals basis.

From the 2024/25 tax year, the rules for the cash basis changed as HMRC want to encourage more businesses to use it. The cash basis is now the default method for preparing accounts.

2 wooden blocks with words written on them, one saying 'CASH' and the other 'BASIS' against a blue background.
Zolak / Shutterstock.com

Content on this page:

General principles

Whereas the accruals basis looks at income earned and expenses incurred, the cash basis allows businesses to account for their income and expenses when they actually receive payment or when they actually pay for an expense. By using the cash basis, you will not need to calculate debtors and creditors at the year-end, nor perform a stock-take or estimate accruals and prepayments as you would if you were using accruals basis accounting.

For smaller businesses the cash basis is likely to be an easier way to prepare their business accounts. 

Example- using the cash basis

Harry is self-employed and his business sells sports equipment. He prepares his accounts to 5 April each year. When Harry prepares his accounts for the year ended 5 April 2025 using the cash basis:

  • Harry sold 100 footballs in March 2024 for £700 to his local football club and they paid for the footballs on 20 April 2024, so Harry includes this income as sales income in his accounts for the year ended 5 April 2025.
  • Harry bought 12 table tennis tables and paid for them all in December 2024. He had 6 tables left still to sell at 5 April 2025.The cost of all 12 table tennis tables is treated as a purchase during the year ended 5 April 2025. There would be no stock asset at the year-end.
  • Harry’s annual vehicle insurance is payable on 1 January each year. The full amount paid on 1 January 2025 is an expense in the accounts for the year ended 5 April 2025, even though the premium is for the year 1 January 2025 to 31 December 2025, and 9 months of this period falls into the year ended 5 April 2026. There will be no insurance prepayment and no accounting adjustment to be made in the 2025/26 tax year.

Under the cash basis, income is recorded when it is actually received. This may be a different date to the sales invoice. Expenses are recorded when they are actually paid; this may be a different date to when the expense is made, for example when stock is delivered or a purchase invoice is received.

There are no strict rules of when income receipts or expense payments should be recognised by a business using the cash basis, but a business must use a consistent approach.

For example, a business must decide what date to use when receiving payments by cheque; is it when the cheque is received from the customer? Or when it is paid into the bank? Or when it is shown on the bank account but cannot be drawn against? Or when the cheque has cleared? So, if a business decides to record income only after cheques have been cleared then that approach must be used consistently for all cheque receipts.

  For the 2024/25 tax year onwards the cash basis is the default method to prepare self-employment accounts. This means HMRC assume you are using the cash basis rules to prepare your business accounts unless your elect (tick a box on the self assessment tax return) to confirm you are using the accruals basis instead. Some businesses must use the accruals basis if they are not eligible to use the cash basis (see Eligibility heading below).  

Before the 2024/25 tax year, the accruals basis was the default option to prepare  self-employment accounts. If you wanted to use the cash basis for your accounts, you needed to elect to do so on your self assessment tax return by ticking the relevant box in the self-employed section of the tax return.

Although HMRC expect businesses using the cash basis to have more simplified accounting than under the accruals basis, a business will still be expected to keep the proper business records required to complete an accurate self assessment tax return.

A business using the cash basis should still keep a record of its debtors, creditors and stock so that the business can work effectively.

Eligibility

The rules for the cash basis changed for the 2024/25 tax year onwards. The table below highlights any changes because of the new rules and confirms where there are no changes. The notes following the table provide more details about the eligibility rules before and after 6 April 2024.

  2024/25 tax year onwards 2023/24 tax year and previous tax years
Type of business (see Note 1 below)

Certain businesses are not eligible to use the cash basis or may want to choose to use the accruals basis instead.

 
To use the cash basis (see note 2 below) No election needed on tax return Election needed on tax return
Annual sales entry threshold (see note 3 below) There is no annual sales entry threshold There was an annual sales entry threshold. For 2023/24 it was £150,000 and £300,000 for universal credit claimants
Annual sales exit threshold (see note 4 below) There is no annual sales exit threshold There was a sales exit threshold. For 2023/24 it was annual turnover of £300,000
More than one business (see note 5 below)

You can decide to use the cash basis for each trade individually

 

If you elected to use the cash basis for one of your businesses, you had to use it for all of them

 
Partnerships (see note 6 below)

You do not need to consider the position of any controlling partner as there is no longer a sales entry threshold.

 

 You needed to consider the position of a controlling partner when looking at the annual sales entry threshold.

The notes below explain the rules in more detail under the relevant headings.

Note 1- Type of business

There are certain businesses that are not allowed to use the cash basis: these include partnerships where at least one of the partners is not an individual and self-employed people using the profit-averaging election. A complete list of the businesses that cannot use the cash basis can be found on GOV.UK. This position has not changed with the expansion of the cash basis from April 2024.

Note 2- To use the cash basis

From April 2024 you do not need to make an election on your tax return as the cash basis is now the default method to prepare your self-employment accounts.

Before the 2024/25 tax year you needed to make an election on your self assessment tax return to use the cash basis. The accruals basis was the default method to prepare your self-employment accounts.

Note 3- Annual sales entry threshold

You can still use the cash basis if you are VAT-registered.

For the 2024/25 tax year onwards there is no annual sales entry threshold to use the cash basis. This means you can use the cash basis if you have turnover above the previous entry threshold of £150,000 (or £300,000 for universal credit claimants).  It also means that partnerships no longer have to consider the position of any controlling partner to see if they are eligible to use the cash basis.

For the 2017/18 to 2023/24 tax years most sole traders and partnerships with annual sales or turnover of less than £150,000 could elect on their self assessment tax return to use the cash basis. However, for universal credit (UC) claimants the entry threshold was double, at £300,000.

Note 4- Annual sales exit threshold

For the 2024/25 tax year onwards there is no exit threshold.

For the 2017/18 to 2023/24 tax years, the exit threshold was annual turnover of £300,000. You had to leave the cash basis the year after your turnover was higher than the exit threshold.

Note 5- More than one business

From the 2024/25 tax year onwards, if you have more than one self-employment you no longer need to use the cash basis for all your businesses, you can decide for each trade individually.

Before the 2024/25 tax year, if you had more than one business and you elected to use the cash basis for one of your businesses, then you must also have used the cash basis for all your other businesses. The total of the turnover (sales) of all your businesses was used when looking at the entry and exit levels of the cash basis.

Note 6- Partnerships

As there is no annual sales entry threshold from the 2024/25 tax year onwards, this also means that partnerships no longer have to consider the position of any controlling partner to see if they are eligible to use the cash basis.

Before the 2024/25 tax year when there was an annual sales entry threshold, if you were a partner in a partnership, then you must have looked at the position of the controlling partner to see if you were eligible to use the cash basis. HMRC’s Business Income manual provides further guidance on this.

Universal credit claimants

As shown in the table in the Eligibility section above, from the 2024/25 tax year onwards there are no longer any entry or exit thresholds for universal credit (UC) claimants to use the cash basis.

If you are self-employed and claiming UC then you will need to report your business income and expenses to the Department for Work and Pensions (DWP) on a monthly basis. Unfortunately, universal credit cash accounting is different to the self assessment optional cash basis.

Specific expenses rules and trading losses

The cash basis rules have changed for the 2024/25 tax year onwards and this affects the tax treatment of some specific business expenses and also trading losses. The table below highlights any changes arising from the new rules and confirms where there are no changes. The notes following the table provide more detail about specific expenses and trading losses before and after 6 April 2024.

  2024/25 tax year onwards 2023/24 tax year and previous tax years
Bank and loan interest costs and financing costs (see note 1 below) No restriction on the amount for business purposes.

Annual allowable amount of up to £500.

 
Business expenses: capital equipment (see note 2 below) Most capital equipment can be treated as an expense under the cash basis, but this does not include land, buildings and cars (capital allowances can usually be claimed on cars).
Trading losses (see note 3 below) Same trading losses available as if using the accruals basis. Carry forward of losses to use against profits of same trade (unless business stopped trading).

The notes below explain the rules in more detail under the relevant headings.

Note 1- Bank and loan interest costs and financing costs

For the 2024/25 tax year onwards the £500 restriction on interest and finance costs is removed when these expenses are made wholly and exclusively for the purpose of the trade. For example, if your business loan charged £800 interest in the 2024/25 year you can use the cash basis and have tax relief on the full £800.

Before the 2024/25 tax year, bank and loan interest costs and financing costs, which include bank loan arrangement fees, were allowed up to an annual amount of £500. If the business had interest and finance costs of less than £500 then the split between business costs and any personal interest charges did not have to be calculated. If business interest and finance costs were more than £500 it may have been more appropriate for the business to use the accruals basis and obtain tax relief for all the business-related financing costs.

Interest on hire purchase and trade purchases were not included in the annual amount of £500 and could be treated as separate expenses.

Note 2- Business expenses: capital equipment

For all tax years, most capital equipment can be treated as a revenue expense under the cash basis. However certain capital purchases can’t be treated as an expense such as land, buildings and cars (capital allowances can usually be claimed on cars). This means that capital allowances on eligible capital equipment (that is capital equipment other than cars) do not need to be calculated.

Any vehicles (apart from cars) purchased when using the cash basis must stay in the cash basis even if the business then switches to use the accruals basis (so you cannot claim the expense using the cash basis and then include the vehicle in a capital allowance pool).

Note 3- Trading losses

For the 2024/25 tax year onwards, the trading loss rules have changed so it is possible to use the same trading loss reliefs available to businesses using the accruals basis. This means that from 2024/25, losses arising when using the cash basis can now be offset against other taxable income in the same tax year (known as sideways loss relief) or carried back against taxable income in the previous tax year, as well as carried forward to use against future trading profits. See our Trading losses page for more information about the various ways trading losses can be used to reduce your tax.

For tax years before 2024/25, any trading losses could be carried forward to be offset against business profits in the future. It was not possible to carry losses back to be used against profits made in the previous three tax years (unless your business stops trading) or to use losses against other income earned during the same tax year (known as sideways loss relief) as you could do if you prepared accounts on the accruals basis.

If your business made losses during the 2023/24 tax year, then it may not have been appropriate to have used the cash basis as there were more ways to get tax relief for losses by using the accruals basis.

Changing to accruals basis

If you leave the cash basis then there are transitional rules when electing to use the accruals basis. These rules are to ensure that overall taxable profits are correct by taxing income and deducting all expense payments only once.

The steps you will need to take to move from the cash basis to the accruals basis are made during the first year of using the accruals basis, but the tax adjustment is spread over six years. However, this six-year period can be shortened if you prefer.

  The spreading adjustment when moving from the cash basis to the accruals basis is different to the spreading of profits if you are affected by the basis period reform rules.

The best way to explain this is by considering an example:

Example – changing from cash basis to the accruals basis

Emilio runs a small gift shop and has prepared his accounts to 31 March each year under cash basis rules up to and including his accounts for the year ended 31 March 2024. Points to note regarding Emilio’s accounts for the year ended 31 March 2024, the details from which were included on his 2023/24 tax return:

  1. During March 2024, Emilio made sales of £1,000 but at the year-end only £400 of these sales had been paid for and therefore the business had debtors of £600. When Emilio prepared his accounts for the year ended 31 March 2024, he only included £400 of the March sales, as this was the income he actually received. Emilio received payment for the remaining £600 debt in April 2024.
  2. Emilio purchased some clothes to sell in his shop in March 2024. However, he only paid for this stock in June 2024.
  3. Emilio purchased a new till under hire purchase, which had a capital cost, excluding interest charges, of £1,500 and he had made payments of £400 towards the capital cost of the till by the end of March 2024.

However, Emilio decides it would be beneficial to use the accruals basis due to the regular stock-takes he needs to make and moves to the accruals basis of accounting for his accounting year to 31 March 2025 (2024/25 tax year).  The effect of this on the above is as follows:

  1. Any sales made under the cash basis where payment was received after moving to the accruals basis must be included as income under the accruals basis tax year otherwise this income will not be taxed. Therefore, Emilio needs to account for the income of £600 in 2024/25 even though he is now using the accruals rules because otherwise this income would not be taxed. Emilio needs to increase his sales income in 2024/25 by up to £600, depending on his spreading adjustment (as explained under the heading, The spreading adjustment below).
  2. Any expenses incurred under the cash basis but not actually paid for until the business was using the accruals basis, must be deducted under the accruals basis. Emilio would not have included the clothing stock as an expense during the 2023/24 tax year as he did not pay for the stock until the following tax year. Therefore, an adjustment must be made under the transitional rules to include this stock as an additional expense in the 2024/25 tax year.
  3. Capital expenditure will normally be treated as an expense under the cash basis and upon moving to the accruals basis will be treated as a capital allowance asset with no capital allowances left to claim. The exception to this rule will be when an asset has been bought on hire purchase as only the cash payments made will have been treated as an expense under the cash basis. After moving to the accruals basis, the remainder of the cost of the asset will either be treated as unrelieved expenditure in the general capital allowances pool or be fully written down using the annual investment allowance.

Therefore, when Emilio moves from the cash basis to the accruals basis, he will be able to treat the till as an asset qualifying for capital allowances and will claim either the annual investment allowance for £1,100 (which is the total cost less payments made so £1,500 less £400) or include £1,100 as a general pool asset and claim writing down allowances.

We cover changing to the cash basis from the accruals basis on our Accounts: accruals basis webpage.

The spreading adjustment

  The spreading adjustment explained below is different to the spreading of profits if you are affected by the basis period reform rules.

When leaving the cash basis, any additional income arising from the move to the accruals basis is spread over six years and taxed 1/6th in each year.  If you do not want to spread the adjustment income over six years you can elect to accelerate the charge and decide how much you want it to be in each tax year.

Example - accelerating the spreading adjustment

Isha wants to move from the cash basis to the accruals basis of accounting for her accounting period ending on 31 March 2025 (2024/25 tax year). She had sales income of £2,400 from the year ended 31 March 2024 which she had not received by 31 March 2024. She received this income in the first few months of her accounting period for the year ended 31 March 2025 and so this is additional income for 2024/25 by moving from the cash basis to the accruals basis in 2024/25.

Isha’s adjustment income of £2,400 would be taxed equally over six years, so there would be £400 additional income for each tax year from 2024/25 to 2029/30.

The following year, 2025/26, Isha decides she wants to pay tax on the adjustment income as soon as possible so she elects to treat the remaining adjusted income of £2,000 (which is the total adjustment income less the amount taxed in 2024/25 £2,400 - £400) as falling in the 2025/26 tax year which increases her income by £2,000. No further spreading adjustment is made in later years.

Isha must make an election to accelerate the spreading adjustment within one year of the self assessment tax return filing deadline. So, Isha must make her election by 31 January 2028 (one year after the 2025/26 filing deadline).

Leaving the cash basis before 6 April 2024

For the 2024/25 tax year onwards the cash basis is the default way of preparing your self-employment accounts, unless you elect to use the accruals basis instead.

This section explains the rules for the 2023/24 tax year and prior tax years.

If you elected to use the cash basis then you should have continued to use it until either:

  • your turnover increased above the exit threshold of £300,000, or
  • there were commercial reasons for leaving the cash basis (these included having financing costs of over £500 per annum or wanting to use sideways loss relief).

The following illustration shows when it may be appropriate to change from the cash basis for commercial reasons before the 2024/25 tax year.

Example - leaving the cash basis before 6 April 2024

Alison’s business used the cash basis in the tax year 2022/23, but during the tax year 2023/24 Alison has taken out a new business loan – the loan arrangement fee was £250 and the annual interest charge will be £400. Under the cash basis in 2023/24, Alison will only receive tax relief of £500 for the interest and loan arrangement fee even though the actual cost to her business is £650. By leaving the cash basis in 2023/24 Alison will be able to deduct all of the £650 as a business financing expense under the accruals basis.

If this had happened in the following tax year (2024/25) Alison would have been able to use the cash basis and deduct all the £650 as a business financing expense (see heading above Specific expense rules and trading losses). 

More information

Our guide to self-employment is intended to supplement the material in this section. We wrote this guide to help advisers (non-tax) who advise low-income self-employed individuals and also for self-employed people who want more detailed information in one accessible place. The guide explains the less common tax rules and contains more detailed information including a case study showing how to prepare accounts and what to include on your 2024/25 tax return when using the cash basis.

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