Cash Basis Accounting: The 2024 Default for Sole Traders

Cash basis accounting means you record income when the money reaches you and expenses when you pay them, not when an invoice is raised or received. Since 6 April 2024 it is the default method HMRC uses to work out the taxable profit of most sole traders and partnerships. You no longer opt in; you now have to opt out if you want the older, more complex approach.

That switch matters because a lot of older guidance, and even some accountants, still describe cash basis as a scheme with a £150,000 turnover cap that you elect into. HMRC scrapped that cap for the 2024/25 tax year. This guide covers how cash basis works, how it differs from traditional accruals accounting, who cannot use it, and the situations where electing for accruals is still the better call.

Key Takeaways

• Cash basis records income when received and expenses when paid; you ignore money you are owed and bills you have not yet settled at the year end.
• From 6 April 2024 (the 2024/25 tax year) cash basis is HMRC's default for sole traders and eligible partnerships, and the old £150,000 entry and £300,000 exit turnover limits were removed.
• Traditional (accruals) accounting is now the thing you have to actively elect for, by ticking a box on your Self Assessment return.
• The old £500 cap on deducting interest and finance costs is gone, and cash basis losses can now be used the same way as accruals losses.
• Cash basis suits most service businesses paid reasonably promptly; accruals suits businesses carrying stock, large unpaid invoices, or wanting to match costs to the sales they relate to.

What is cash basis accounting?

Under cash basis you count income on the date the money lands in your account and count an expense on the date you pay it. Nothing else moves the number. An invoice you sent in March but that gets paid in April is April's income. A supplier bill dated in March that you settle in May is a May expense.

The point of this is simplicity. You are not tracking debtors (money owed to you) or creditors (money you owe) at the year end, and you are not making accrual or prepayment adjustments. HMRC's own summary is blunt: with cash basis "you only record income or expenses when you receive money or pay a bill." For a one-person business that invoices and gets paid within a few weeks, the tax figure ends up close to what accruals would produce anyway, with far less work.

There is one more practical difference worth knowing. Under cash basis you claim most equipment you buy for the business, tools, a laptop, a camera, as a normal allowable expense in the year you pay for it, rather than working out capital allowances. Cars are the exception: you either use the simplified mileage rate or claim capital allowances, but not both for the same vehicle.

A worked example: why the timing differs

Say you are a freelance designer. You finish a project and issue a £5,000 invoice on 20 March 2026. The client pays on 15 April 2026.

• On cash basis, that £5,000 is income for the 2026/27 tax year, because that is when the money arrived. The tax on it falls due on 31 January 2028.
• On accruals, the same £5,000 is income for 2025/26, because that is when you did the work and raised the invoice. The tax falls due on 31 January 2027, a full year earlier.

Same £5,000, same client, but cash basis pushes the tax point back a year here because the payment crossed the 5 April tax-year boundary. It works in both directions: an expense you pay just before 5 April lands in the earlier year, giving you relief sooner. For the deadlines those tax points feed into, see our guide to Self Assessment deadlines.

Cash basis vs traditional accounting

Traditional accounting, which HMRC calls the accruals basis, records income when it is earned and expenses when they are incurred, regardless of when cash moves. It is the standard for company accounts and the more accurate picture for a business with stock or long payment cycles.

Neither method changes how much profit you make over the life of the business. They change which tax year a given pound of income or expense falls into, and how much record-keeping that takes.

What changed on 6 April 2024

The reform that made cash basis the default did four separate things, all effective from the 2024/25 tax year:

1. Cash basis became the default. HMRC now sets "the cash basis as the default method of calculating trading profits", and you calculate your profit that way "unless they make an election to use the accruals basis."
2. The turnover limits were removed. Before 6 April 2024 you could only join cash basis with turnover of £150,000 or less, and had to leave once total turnover passed £300,000. Both limits are gone, so a business of any size that is otherwise eligible can use it.
3. The interest cap was scrapped. The old rules limited the interest and finance costs you could deduct under cash basis to £500 a year. HMRC removed that restriction, so cash basis now allows the same interest deduction as accruals.
4. Loss relief was aligned with accruals. Cash basis losses can now be set sideways against your other income or carried back to earlier years, the same options open to accruals businesses.

If you last read up on cash basis before 2024, points 2 to 4 are the ones most likely to trip you up.

Who can and cannot use cash basis

Cash basis is open to sole traders and partnerships made up only of individuals. If you run more than one business, you can pick cash basis for one and accruals for another.

Some businesses are specifically excluded. You cannot use cash basis if you are:

• A limited company or a limited liability partnership (LLP).
• A partnership with a company as one of its partners.
• A Lloyd's underwriter.
• A farming business using the herd basis, or a farming or creative business using profit averaging.
• A business that has claimed business premises renovation allowance in the last seven years, carries on a mineral extraction trade, or has ever claimed research and development allowance.

Limited companies are the big one to remember: they must use traditional accounting for their statutory accounts, so cash basis is a sole-trader and partnership tool only.

How to choose, and how to opt out

Because cash basis is now automatic, doing nothing keeps you on it. You only need to act to use traditional accounting: you tick the box on the self-employment pages of your Self Assessment return to say you have used accruals. That election applies for the year you make it.

Stay on cash basis if you are a service business, invoice clients, and get paid within a reasonable window. It is simpler, it lines up with what your bank statement already shows, and it does not tax you on income you have not yet received.

Consider electing for accruals if any of these apply:

• You carry significant stock. Accruals matches the cost of goods to the sales they produce, which stops a big pre-year-end stock purchase distorting one year's profit.
• You have large unpaid invoices at the year end. With big debtors, the two methods can produce very different profit figures in a given year, and accruals may smooth that.
• You need the accounts for something else, such as a mortgage application or bringing in an investor, where a matched, accruals-based profit is expected.

For most sole traders none of these apply, which is exactly why HMRC made cash basis the default.

Common misconceptions

"Cash basis has a £150,000 turnover limit." It did, until 5 April 2024. The cap and the £300,000 exit threshold were both removed for 2024/25 onwards. Turnover no longer decides whether you can use it.

"You have to elect to use cash basis." The opposite is now true. Cash basis is the default; the election is for accruals. If you have not ticked the traditional-accounting box, you are on cash basis.

"Cash basis is only for tiny hobby businesses." Eligibility is about your structure and trade, not your size. A sole trader turning over £250,000 can use cash basis; a small limited company cannot.

How SparkReceipt fits

Cash basis rewards clean records of what you paid and received, and that is the pre-accounting work SparkReceipt handles. Scan a receipt and the AI reads the date, amount, currency, and category; upload a bank statement and it matches each transaction against your receipts, so the money-in and money-out that cash basis runs on are captured as they happen rather than rebuilt in January. At filing time you can pull a filtered expense report or publish to QuickBooks or Xero. See pricing to get started.

FAQ

Is cash basis the same as single-entry bookkeeping? No. Cash basis is a rule about when income and expenses are counted for tax. Single-entry versus double-entry is about how you write them down. You can keep cash-basis records in a simple list or in double-entry software; the tax result is the same.

Can I switch between cash basis and accruals each year? You can change method, but HMRC expects a commercial reason rather than year-to-year tax shopping, and the switch year needs adjustments so income and expenses are not counted twice or missed. If you carry debtors, creditors, or stock, get those transition figures right or take advice.

Does cash basis affect my VAT? The income-tax cash basis is separate from the VAT Cash Accounting Scheme, which has its own rules and turnover threshold. Being on one does not put you on the other. Check our VAT registration threshold guide for the VAT side.

How does cash basis work with Making Tax Digital? Making Tax Digital for Income Tax will require digital records and quarterly updates, and cash basis remains available as the default within it. If your income means MTD applies to you, our Making Tax Digital guide covers the timeline.

Do I still keep receipts on cash basis? Yes. Cash basis simplifies the calculation, not your record-keeping duty. You still need to keep evidence of every business payment and receipt to support the figures on your return.

Key takeaways

• Cash basis counts income when received and expenses when paid, and ignores year-end debtors and creditors.
• Since 6 April 2024 it is HMRC's default for sole traders and eligible partnerships; traditional accruals accounting is now the option you elect for.
• The old £150,000 entry cap, £300,000 exit cap, and £500 interest limit were all removed for 2024/25, and cash basis losses now get the same relief as accruals losses.
• Limited companies and LLPs cannot use cash basis; it is a sole-trader and partnership method.
• Cash basis fits most service businesses; elect for accruals if you carry stock, hold large unpaid invoices, or need matched accounts for a mortgage or investor.