Updated on 6 April 2026

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 traditional accounting (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, but some businesses must use traditional accounting if they are not eligible to use the cash basis.

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

Zolak / Shutterstock.com

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General principles

Whereas traditional accounting (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 traditional 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 2026 using the cash basis:

Harry sold 100 footballs in March 2025 for £700 to his local football club and they paid for the footballs on 20 April 2025, so Harry includes this income as sales income in his accounts for the year ended 5 April 2026.
Harry bought 12 table tennis tables and paid for them all in December 2025. He had 6 tables left still to sell at 5 April 2026.The cost of all 12 table tennis tables is treated as a purchase during the year ended 5 April 2026. 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 2026 is an expense in the accounts for the year ended 5 April 2026, even though the premium is for the year 1 January 2026 to 31 December 2026, and 9 months of this period falls into the year ended 5 April 2027. There will be no insurance prepayment and no accounting adjustment to be made in the 2026/27 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 through an online platform; is it when the payment is received from the customer into the online platform? Or when that payment is transferred into the business’s own bank account? So, if a business decides to record income only after payments have been transferred from the online platform to its own bank account then that approach must be used consistently for all receipts from sales using an online platform.

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 or, from 2026/27 onwards, choose an option on your software if you are using Making Tax Digital for income tax) to confirm you are using traditional accounting instead. Some businesses must use traditional accounting if they are not eligible to use the cash basis (see Eligibility heading below).

Before the 2024/25 tax year, traditional accounting (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 traditional accounting, a business will still be expected to keep the proper business records required to complete an accurate self assessment tax return or, from 2026/27 onwards, an end of year return under Making tax Digital for income tax

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 traditional accounting (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. Traditional accounting (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. If you are VAT-registered and using the cash basis then how you record your income may affect when you must use Making Tax Digital for income tax, we explain more on our page Making Tax Digital for the self-employed.

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 traditional accounting 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 traditional accounting (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 traditional accounting. This means that from 2024/25 onwards, 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 stopped 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 using traditional accounting.

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 traditional accounting.

Changing from cash basis to traditional accounting

If you leave the cash basis then there are transitional rules when electing to use traditional accounting (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 traditional accounting are made during the first year of using traditional accounting, 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 traditional accounting 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 traditional accounting (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 2025. Points to note regarding Emilio’s accounts for the year ended 31 March 2025, the details from which were included on his 2024/25 tax return:

During March 2025, 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 2025, 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 2025.
Emilio purchased some clothes to sell in his shop in March 2025. However, he only paid for this stock in June 2025.
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 2025.

However, Emilio decides it would be beneficial to use traditional accounting (accruals basis) due to the regular stock-takes he needs to make and moves to traditional accounting for his accounting year to 31 March 2026 (2025/26 tax year). The effect of this on the above is as follows:

Any sales made under the cash basis where payment was received after moving to traditional accounting must be included as income under traditional accounting otherwise this income will not be taxed. Therefore, Emilio needs to account for the income of £600 in 2025/26 even though he is now using the traditional accounting rules because otherwise this income would not be taxed. Emilio needs to increase his sales income in 2025/26 by up to £600, depending on his spreading adjustment (as explained under the heading, The spreading adjustment below).
Any expenses incurred under the cash basis but not actually paid for until the business was using traditional accounting, must be deducted under traditional accounting. Emilio would not have included the clothing stock as an expense during the 2024/25 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 2025/26 tax year.
Capital expenditure will normally be treated as an expense under the cash basis and upon moving to traditional accounting 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 traditional accounting, 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 traditional accounting, 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 traditional accounting under our heading below, Changing to the cash basis from traditional accounting.

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 traditional accounting (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 traditional accounting for her accounting period ending on 31 March 2026 (2025/26 tax year). She had sales income of £2,400 from the year ended 31 March 2025 which she had not received by 31 March 2025. She received this income in the first few months of her accounting period for the year ended 31 March 2026 and so this is additional income for 2025/26 by moving from the cash basis to traditional accounting in 2025/26.

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 2025/26 to 2030/31.

The following year, 2026/27, 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 2025/26 £2,400 - £400) as falling in the 2026/27 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 2029 (one year after the 2026/27 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 traditional accounting (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 traditional accounting.

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).

Changing to the cash basis from traditional accounting

If you decide you want to move from traditional accounting (accruals basis) to cash basis accounting, there are transitional rules 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 traditional accounting to the cash basis are made during the first year of using the cash basis. The best way to explain this is by considering an example:

Example – moving from traditional accounting to using the cash basis

Joe has a printing business and has prepared his accounts to 31 March each year using traditional accounting (accruals basis) up to and including his accounts for the year to 31 March 2025. Points to note regarding Joe’s accounts for the year ended 31 March 2025, the details from which were included on his 2024/25 tax return:

At the end of the accounting period Joe had sales income of £20,000 which included £1,000 that had not been paid, so his accounts show his turnover (sales) as £20,000 and records debtors of £1,000. In June 2025 he received the payment of £1,000.
Joe purchased printer ink to use in his business in March 2025 and the cost of £300 is included as an expense in his accounts. Joe paid £300 for the ink in May 2025.
At the end of the accounting period Joe had closing stock of paper which he paid £200 for in February 2025. This closing stock is treated as an asset in his accounts to 31 March 2025 (and not an expense).
Joe had a written down value in his plant and machinery general pool of £1,500 at 31 March 2025.

For the 2025/26 tax year, Joe decides to prepare his accounts for the year ended 31 March 2026 using the cash basis. The effect of this on the above is as follows:

Under the cash basis, Joe would usually account for the £1,000 received in June 2025 when he received it, but as Joe is moving from using traditional accounting to the cash basis this would result in £1,000 being taxed twice, both in 2024/25 and 2025/26. Therefore, there is a transitional adjustment to the cash basis income in 2025/26 to reduce sales income by £1,000.
When Joe is using the cash basis, he should account for all expenses when he actually pays for them and as he paid for the printing ink in May 2025 this would usually be treated as an expense in his accounts for the year ended 31 March 2026. However, Joe has already received tax relief for the ink in his accounts for the year ended 31 March 2025. Any expenses purchased using traditional accounting but not paid for until using the cash basis should be disregarded as expenses under the cash basis because tax relief has already been allowed. Therefore, the expense of £300 is ignored in the 2025/26 tax year and the total expenses for this year are reduced by £300 as part of the transitional adjustments.
Under the cash basis, stock is deducted as a purchase expense. Joe has not yet received any tax relief for the £200 as it was an asset in his accounts for the year ended 31 March 2025 under traditional accounting. Therefore, Joe will make an adjustment to treat the closing stock as a purchase expense and will increase his expenses by £200 in 2025/26.
Joe still has a tax written down value left in his plant and machinery general pool for writing down allowances, this means that he has not yet received all the capital allowances for the full cost value of machinery purchased some time ago. When moving to the cash basis, any amounts which still haven’t received full capital allowances are treated as a cash purchase upon joining the cash basis. Therefore, Joe will be able to treat the £1,500 as an expense in the 2025/26 tax year and no longer claim capital allowances.

Many small businesses should not be affected by transitional rule 4 above because most plant and machinery capital expenditure will be covered by the annual investment allowance. Also, the small pools allowance means many residual capital allowances general pool balances for writing down allowance purposes are written off. Therefore, most small businesses will probably not have a capital allowances general pool balance. This rule does not apply to capital assets such as cars or land and buildings.

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 2025/26 tax return when using the cash basis.