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Cash basis vs accruals: which method should you use?

By Buzz Accounting · 2026-07-13

Since the 2024/25 tax year, cash basis accounting is the default for sole traders and partnerships. That reversal is bigger than it sounds. You used to elect into the cash basis; now you calculate your profits that way automatically and elect out onto traditional accruals accounting if you want it. HMRC's own wording is that an election is no longer required to use the cash basis, and businesses calculate trading profits on it unless they elect for the accruals basis.

For most sole traders the default is also the right answer. But it is a real choice with a real number attached — on the figures below the two methods are £2,600 apart in one year — and nobody is going to prompt you to make it. Here is how to decide.

The difference in one line each

Cash basis: you record income when the money actually lands and expenses when you actually pay them. Your accounts follow your bank account.
Accruals (traditional) basis: you record income when you invoice it and expenses when you incur them, whenever the cash moves. Harder work, but it matches income to the period that earned it.

Four things changed in April 2024, and three of them favour the cash basis

The cash basis of 2026 is not the restricted regime that put accountants off it a decade ago. From 2024/25:

It became the default. No election to use it; an election is needed to leave it.
The turnover limits went. The old £150,000 entry threshold and £300,000 forced-exit threshold were both removed, so an eligible business of any size can use it.
The £500 interest cap went. Cash basis users can now deduct interest in full, provided it is incurred wholly and exclusively for the trade. That single change ends the old rule of thumb that anyone with meaningful borrowing should avoid the cash basis.
The loss restrictions went. Cash basis losses used to be trapped — carried forward against future profits of the same trade only. They now work like accruals losses, so they can be set sideways against your general income for the same year or the year before, or carried back.

Point four matters most to anyone with a bad year or a heavy investment year, because it removes what used to be the strongest argument for accruals.

The genuine cashflow advantage

Under the cash basis you are not taxed on money you have not received. Invoice a customer £5,000 in March who pays in May and that income falls in the later tax year. On accruals it lands in the earlier one, and you fund the tax on it out of your own pocket while the invoice sits unpaid.

For a trade with slow payers this is not a rounding difference. It is the whole reason the cash basis exists, and it is why the method pairs well with actually chasing your invoices properly rather than instead of it.

The cost: stock, and the timing trap

The flip side is stock. Under the cash basis you deduct stock and materials when you pay for them, whether or not they have sold. Under accruals, unsold closing stock is added back, because profit is meant to reflect what you actually sold.

Both are legitimate. In a year when you scale inventory up they produce very different bills.

Worked example — a landscaper's year, 2026/27. The business figures are illustrative; every tax rate is the real 2026/27 one.

A sole trader invoices £58,000 during the year, of which £6,400 is still unpaid on 5 April 2027. Costs paid in the year total £21,000, including £9,000 of materials — and £3,600 of those materials is still stacked in the yard at the year end.

Cash basis: receipts £51,600, expenses £21,000, profit £30,600. Income tax on £18,030 above the £12,570 personal allowance at 20% is £3,606; Class 4 National Insurance at 6% on the same slice is £1,081.80. Total £4,687.80.

Accruals: turnover £58,000, expenses £17,400 after adding back the unused materials, profit £40,600. Income tax £5,606; Class 4 £1,681.80. Total £7,287.80.

Same trader, same year's work, £2,600 apart — the £10,000 profit difference taxed at the combined 26% marginal rate. And because payments on account are set at half of last year's bill each, the higher figure also raises the two instalments that follow it.

Read that gap correctly, though: it is timing, not a saving. The £6,400 gets taxed when the customer pays, and the £3,600 of materials would have been deducted later anyway. Cash basis pushes tax back; it does not remove it.

There is also a sting on the way out. When a cash basis trader permanently ceases trading, the value of remaining trading stock must be brought in as a receipt, on a just and reasonable basis. Everything deferred arrives at once in the final year.

Equipment is simpler on the cash basis — with two exceptions

Buy a £4,000 mini-digger and, under the cash basis, you deduct £4,000 in the year you pay for it. No capital allowances pool, no writing down, no calculation. That is a genuine simplification and it is why most trades are better off on the default.

Two exceptions are worth knowing. Cars are excluded — you use either the mileage rate or capital allowances, which is the same fork covered in our post on mileage versus actual vehicle costs. And land, financial assets and the cost of buying a business are not deductible either. When you later sell an asset whose cost you deducted under the cash basis, the sale proceeds come back in as a trading receipt rather than a capital gain.

When electing for accruals is the right call

You can elect out, and sometimes should:

You carry real stock or work in progress. A retailer or manufacturer gets a truer margin from accruals, and the closing-stock discipline stops a good year looking like a bad one purely because you restocked in March.
You are borrowing or raising finance. A lender will usually want accounts drawn up on the traditional basis, because cash basis accounts can misrepresent a year in either direction.
You are managing to a margin. If you price jobs off gross profit percentages, accruals is the only basis that tells you the truth month to month.
You are heading for incorporation. Limited companies must use accruals, so making the switch before you incorporate takes one moving part out of a busy year. Our sole trader vs limited company guide covers the wider decision.

Who cannot use the cash basis at all

The default only applies if you are eligible. Excluded from the cash basis are limited companies, limited liability partnerships, partnerships with corporate partners, Lloyd's underwriters, farming businesses with a herd basis election, farming or creative businesses claiming profit averaging, businesses that have claimed the premises renovation allowance in the past seven years, mineral extraction trades, and any business that has ever claimed research and development allowance.

Switching is a decision, not a toggle

The election is made on your tax return, and you can move between the two bases as circumstances change. What you cannot do is move without adjusting. Transitional rules exist so that income and expenses are neither counted twice nor dropped entirely as they cross the boundary — an invoice already taxed on receipt must not be taxed again on the accruals side, and capital expenditure already deducted under the cash basis does not then enter a capital allowances pool.

That is the part worth handing to an accountant. The choice is yours; the transitional adjustment is where the errors live.

The decision rule

No stock, and customers who pay slowly? Stay on the cash basis. That is most trades, most freelancers and most service businesses.
Real stock, or a lender to satisfy? Price up the accruals election — and run the numbers both ways before you commit, because the difference is a cashflow decision as much as a tax one.
Building towards a limited company? Switch early rather than in the year you incorporate.
Genuinely unsure? Stay on the default. It is the default because it fits the majority, and the door out is open every year.

Making Tax Digital works with both

Whichever basis you use, the Making Tax Digital for Income Tax requirement is identical: digital records kept in software, plus quarterly updates. It starts on 6 April 2026 for qualifying income over £50,000, 6 April 2027 for over £30,000, and 6 April 2028 for over £20,000, each tested on the tax return two years before. FreeAgent, included in our packages, handles either basis and keeps the digital records as you go, so the accounting method stays a setting rather than a burden.

We check the basis suits you every year as part of preparing your return, run the comparison where stock or borrowing makes it close, and handle the transitional adjustment if switching is the right answer — from £19 + VAT a month. Get started.

Quick answers

About this post

Is cash basis or accruals better for a sole trader?

For most sole traders the cash basis is better, which is why it became the default from the 2024/25 tax year. If you sell your time rather than goods, hold little or no stock and wait to be paid, it is simpler and it defers tax on invoices you have not been paid for. Accruals earns its keep in three situations: you carry real stock or work in progress, a lender wants traditional accounts, or you are heading towards incorporating. The honest test is whether the difference between the two is material to you. Run both on last year's figures once, and the answer is usually obvious.

Do I have to tell HMRC I am using the cash basis?

No. Since 2024/25 the cash basis is how your profits are calculated automatically, so there is nothing to claim or notify. The election now runs the other way: if you want traditional accruals accounting, you make an election on your Self Assessment return to opt out. This caught out sole traders who had spent years electing into the cash basis and carried on assuming they needed to. It also means anyone who never thought about it at all is on the cash basis today, whether or not that is the right method for their business.

How does the cash basis treat stock and equipment?

Stock and materials are deducted when you pay for them, not when they sell, so buying £9,000 of materials reduces this year's profit by £9,000 even if some is unused at the year end. Equipment is simpler still: most capital purchases are deducted in full when paid, with no capital allowances pool to maintain. The exceptions are cars, land, financial assets and the cost of buying a business, none of which can be deducted this way. Cars instead use either the mileage rate or capital allowances. When you sell an asset you deducted under the cash basis, the proceeds come back in as a trading receipt.

Can I claim losses if I use the cash basis?

Yes, and this is the change most people have missed. Before 2024/25, cash basis losses could only be carried forward against future profits of the same trade, which was the strongest argument for choosing accruals. That restriction was removed for 2024/25 onwards, so cash basis losses now work exactly like accruals losses: they can be set sideways against your general income for the same tax year or the previous one, carried back, or carried forward. If you were advised to avoid the cash basis because of loss relief, that advice predates the change and is worth revisiting.

Can I switch between cash basis and traditional accounting?

Yes. The election is made on your tax return and you can move between the two as your business changes — typically onto accruals when you start carrying stock, seek finance, or prepare to incorporate. What you cannot do is switch without adjusting. Transitional rules make sure income and expenses are neither taxed twice nor missed as they cross the boundary: an invoice already taxed when it was paid must not be taxed again when you move to accruals, and capital expenditure already deducted under the cash basis does not then go into a capital allowances pool. That adjustment is where the mistakes happen.

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