Since the 2024/25 tax year, cash basis accounting is the default for sole traders and partnerships — a quiet but significant change. Most people never think about it, which is usually fine, because for the typical sole trader the default is also the right answer. But it's worth understanding the choice, because occasionally it isn't.

The difference in one line each

  • Cash basis: you record income when the money actually lands and expenses when you actually pay them. Simple, and it matches your bank account.
  • Accruals (traditional) basis: you record income when you invoice it and expenses when you incur them, regardless of when cash moves. More complex, but it matches income to the period it relates to.

Why cash basis suits most sole traders

It's simpler and more intuitive — your accounts broadly follow your bank feed, so there's less to get wrong. And there's a real cashflow advantage: under cash basis you're not taxed on money you haven't received yet. Invoice a client £5,000 in March who doesn't pay until May, and under cash basis that income falls in the later tax year (when you got it), not the earlier one. For a sole trader waiting on slow payers, that can genuinely help.

When accruals is worth choosing instead

You can elect out of cash basis onto accruals, and sometimes should:

  • You want a true picture of profitability — accruals matches income and costs to the period they belong to, which matters if you're managing margins or planning growth.
  • You carry stock or have significant work-in-progress — accruals handles these more meaningfully.
  • You have complex loss relief needs — accruals offers more flexibility in how losses can be used against other income.
  • You're heading towards incorporation — limited companies must use accruals, so accruals experience eases the transition (see our sole trader vs limited guide).
Don't overthink it For the majority of sole traders — service businesses, trades, freelancers with modest, simple finances — cash basis is now the default precisely because it's the sensible choice for most. If you're unsure, that's a sign you're probably fine on the default. We check whether the default suits you as part of preparing your return; where accruals would genuinely serve you better, we'll say so and elect accordingly.

Making Tax Digital works with both

Whichever basis you use, the Making Tax Digital record-keeping requirement is the same — digital records via software. FreeAgent (included in our packages) handles either basis and keeps the digital records automatically, so the accounting method is a setting, not a burden. Get started.