Cash basis vs traditional accounting for sole traders and partnerships
Cash basis is the default for sole traders and partnerships from 2024/25 - who is excluded, how to opt out and what switching to accruals means.
The short answer
Under the cash basis you are taxed on the money you actually received in the year, less the business expenses you actually paid. Under traditional accounting (the accruals basis, or "generally accepted accounting practice" in the legislation) you count income when you earn or invoice it and costs when you incur them, whether or not the cash has moved. Since the 2024 to 2025 tax year the cash basis is the default for sole traders and for partnerships (other than LLPs) whose partners are all individuals: you use it automatically unless your business is excluded or you opt out (ITTOIA 2005 s.24A; GOV.UK cash basis).
The statutory calculation is two steps: total receipts received during the tax year, minus total expenses paid during the tax year, subject to any adjustment the tax rules require (s.31E). There is no need to account for debtors, creditors, stock or work in progress (BIM72005). This page is about Income Tax on trading profits. Limited companies cannot use it.
What changed on 6 April 2024
Finance Act 2024 Schedule 10 rewrote the rules for the 2024 to 2025 tax year onwards. HMRC's manual says all eligible businesses must use the cash basis from 6 April 2024 unless they elect to use generally accepted accounting practice (BIM70000). Four things changed:
- Opt in became opt out. The old election to use the cash basis (former s.25A) was replaced by an election to use traditional accounting (s.25C).
- No turnover limits. Before, you could join only with cash basis receipts of up to £150,000 (or the VAT threshold if higher; £300,000 or twice the VAT threshold if higher for a Universal Credit claimant), and had to leave once the previous year's receipts passed £300,000 (or twice the VAT threshold if higher) (s.31B as at 5 April 2024). Those sections were omitted from 2024 to 2025.
- No £500 interest cap. Interest on a loan was not deductible under the old cash basis except up to £500 a period, a limit that also covered incidental costs of finance (s.51A and s.57B as at 5 April 2024). Both sections were omitted, so interest is now tested under the normal rules. HMRC's manual lists only two cash basis exceptions to the ordinary expense rules: capital expenditure and the car hire restriction (BIM72030).
- Losses can be used sideways. A loss made on the old cash basis could not be set against other income or capital gains (ITA 2007 s.74E as at 5 April 2024). That section was omitted from 2024 to 2025, so the ordinary loss relief rules (and their own limits) apply.
The legislation.gov.uk notes on s.31A, s.31B, s.51A, s.57B and ITA s.74E each record them as omitted from 6 April 2024 for 2024 to 2025 and later years by Finance Act 2024 Sch. 10. If you have more than one business, you can choose the cash basis or traditional accounting for each one separately (GOV.UK); before 6 April 2024 you had to use the same basis for all of them.
Budget 2026 (28 October 2026). We read the overview of tax legislation and rates and found no announced change to the trading cash basis. Its only accruals-basis item concerns how certain social security benefits are taxed, not business profits.
Who cannot use the cash basis
The cash basis is an Income Tax rule for unincorporated businesses, so limited companies cannot use it (BIM72010). For everyone else, a trade is excluded for a tax year if any of conditions A to G in s.25B is met:
- A. The business is a partnership and at least one partner during the year was not an individual (for example, a company).
- B. The business was a limited liability partnership (LLP) at any time in the year.
- C. A herd basis election has effect for the year (farmers).
- D. A claim to average fluctuating profits has been made for the year (farmers and creative artists).
- E. A business premises renovation allowance was obtained for the trade in the 7 years before the tax year.
- F. The trade is, or was during the year, a mineral extraction trade.
- G. A research and development allowance was obtained for the trade before the tax year and you still own an asset representing that expenditure. (GOV.UK shortens this to "ever claimed research and development allowance"; the statute adds the ownership condition.)
Lloyd's underwriters are also outside it: both GOV.UK and BIM72010 list them, and s.24A(5) leaves the separate Lloyd's profit rules untouched. If you are excluded you must use traditional accounting and say so on your return.
Rules you lose on the cash basis. Some special trade rules apply only under traditional accounting, so a business that relies on them may prefer to opt out. BIM72010 lists: dealers in securities (ITTOIA s.149 to s.154A), relief for mineral royalties (s.157), lease premiums (s.158), ministers of religion (s.159), mineral exploration and access (s.161), payments by persons liable to pool betting duty (s.162), intermediaries treated as making employment payments (s.163 to s.164), managed service companies (s.164A), waste disposal (s.165 to s.168) and cemeteries and crematoria (s.169 to s.172ZE).
How to opt out to traditional accounting
You opt out by ticking the traditional accounting box on the self-employment pages of your Self Assessment return. On the 2025 to 2026 paper forms that is box 8 on the short pages, "Put an 'X' in box 8 if you used traditional accounting instead of cash basis" (SA103S notes), and box 10 on the full pages (SA103F notes).
Tick it every year. The statute says an election continues for later years until you elect back into the cash basis or the trade becomes excluded (s.25C(2) and (3)). HMRC's manual, however, says the election "is made using the checkbox on the SA return", that if the box is not completed the cash basis must be used, and that a trader who wants to stay on traditional accounting "must therefore check the appropriate box on their self-assessment tax return each year" (BIM72055). Following HMRC's instruction is the safe course.
When traditional accounting may suit you better. GOV.UK suggests it for a business that is complex, for example with high levels of stock, or that needs finance, because a bank may want accruals accounts showing what you owe and are owed. Without the stock and debtor adjustments, cash basis profit can swing from year to year with the timing of payments.
Capital spending, cars and land
On the cash basis, capital spending is generally an allowable expense in the year you pay it, so equipment such as tools, computers, machinery and vans is deducted like any other cost rather than through capital allowances (BIM72035). Section 33A then blocks a deduction for capital spending on or in connection with:
- acquiring or disposing of a business or part of one;
- education or training;
- an asset that is not a "depreciating" asset, meaning one not reasonably expected, when you pay for it, to reach the end of its useful life or lose 90% or more of its value within 20 years;
- an asset not acquired or created for continuing use in the trade;
- a car;
- land;
- a non-qualifying intangible asset (broadly, one that is not certain to end within 20 years); and
- a financial asset.
Cars still go through capital allowances on the cash basis, unless you use the simplified expenses mileage rate for that car instead (BIM72035; GOV.UK). Fixtures: a depreciating asset that becomes part of the land when installed can be deducted, but not spending on a building, a wall, floor, ceiling, door, gate, shutter, window or stairs, a waste disposal, sewerage or drainage system, or a lift shaft (s.33A(5); BIM72036). When you later sell an asset whose cost was relieved under the cash basis, the proceeds are taxed as a trade receipt or as capital allowance disposal proceeds rather than as a chargeable gain (BIM72035).
Stock and debtors. Stock you buy for resale is deducted when you pay for it, with no closing stock valuation, and money customers owe you is not income until it arrives. Bad debts therefore need no separate relief (BIM72005, BIM72030). If the trade stops, the value of stock on hand at that point is brought in as a receipt on a just and reasonable basis (BIM72025). For what else counts as an expense, see the self-employed allowable expenses guide.
Worked example: the same year under each basis
Illustrative figures for a sole trader in their first year of trading (so there is no transitional adjustment on the way in). In the year they invoiced £47,000, of which £6,000 was still unpaid on 5 April. They bought and paid for £10,000 of stock, of which £2,500 was unsold at the year end. Other costs came to £6,000, with £600 of bills still unpaid. In March they paid £1,200 for a year's insurance, of which £100 relates to this tax year.
| Cash basis | Traditional | |
|---|---|---|
| Income | £41,000 | £47,000 |
| Stock | -£10,000 | -£7,500 |
| Other costs | -£5,400 | -£6,000 |
| Insurance | -£1,200 | -£100 |
| Taxable profit | £24,400 | £33,400 |
The cash basis profit is £9,000 lower this year. That is timing, not a saving: if they stay on the cash basis, the £6,000 owed to the business is taxed when it is received next year, and the unsold stock and prepaid insurance were simply deducted earlier. To see the tax on a profit figure, use the self-employed tax calculator.
If they switch to traditional accounting the next year, HMRC's two-step calculation (BIM72071) adds the money owed by customers and the stock paid for (£8,500) and takes off what they owed suppliers (£600) and any income received in advance (none here), giving adjustment income of £7,900. A positive figure is spread over 6 tax years, £1,316.67 a year (rounded) in this example (s.239A). The prepaid insurance is not in that sum: it was fully deducted on the cash basis, so the part that appears as a cost in the next year's accounts is disallowed instead (BIM72070, BIM72072).
Switching between the two bases
Moving either way may need a transitional adjustment so that income is taxed once and costs are relieved once (BIM72060, BIM72070). A new business filing its first return needs none.
- Leaving the cash basis. Debtors plus stock paid for, minus creditors and income received in advance. A positive result (adjustment income) is taxed one sixth a year over 6 tax years (s.239A). You can elect to bring extra amounts into an earlier year, by the first anniversary of that year's normal Self Assessment filing date (s.239B). A negative result is deducted in full in the first year, with no spreading (BIM72071). Equipment you deducted while on the cash basis goes into a capital allowances pool with the amount already relieved taken off, often leaving a nil balance (BIM72073).
- Joining the cash basis (for example, stopping ticking the box, which HMRC treats as returning to the cash basis: BIM72060). In the first cash basis year you take last year's debtors out of receipts and last year's creditors out of payments, and account for opening stock, accruals and prepayments (BIM72060). Any unrelieved balance left in a capital allowances pool for equipment that is cash basis deductible becomes a deduction in that first year and the pool goes to nil; a car pool carries on (BIM72067).
The SA103 notes point to helpsheet HS222 for transitional adjustments. If the sums are large, take advice from an accountant.
Property income has its own rule
Rental income from a property business is not a trade and follows a separate rule. The cash basis is the default there too, but traditional accounting is compulsory if the business is carried on by a company, an LLP, a partnership with a non-individual partner or trustees, or if cash basis receipts for the year exceed £150,000 (reduced proportionately for a part year), along with two narrower cases. Landlords can also elect for traditional accounting, by the first anniversary of the normal filing date (ITTOIA 2005 s.271A). See the landlord tax guide.
Related tools and guides
- Self-employed tax calculator: Income Tax and National Insurance on your profit.
- Simplified expenses calculator: flat rates for vehicles, working from home and living at your premises, available on either basis.
- Trading allowance optimiser: whether the trading allowance beats claiming your actual expenses.
- Allowable expenses guide: what you can deduct.
- Self Assessment step by step: registering, filing and paying.
Frequently asked questions
Is the cash basis the default for sole traders?
Yes, from the 2024 to 2025 tax year. ITTOIA 2005 s.24A says the profits of a trade must be calculated on the cash basis unless the trade is excluded or you have elected to use generally accepted accounting practice (traditional accounting). Before 6 April 2024 it worked the other way round: you had to opt in, and only if your turnover was within the limit.
Who cannot use the cash basis?
Limited companies, limited liability partnerships and partnerships with a partner who is not an individual. Also excluded: Lloyd's underwriters, and businesses with a herd basis election, a profit averaging claim, a business premises renovation allowance in the previous 7 years, a mineral extraction trade, or a research and development allowance claim where they still own the asset.
How do I opt out of the cash basis?
Tick the traditional accounting box on the self-employment pages of your Self Assessment return (box 8 on the short pages, box 10 on the full pages for 2025 to 2026). The statute says the election carries on into later years, but HMRC's manual says that if the box is not ticked the cash basis must be used, so tick it every year you want to stay on traditional accounting.
Is there still a turnover limit for the cash basis?
No, not for a trade. The old entry limit (£150,000, or the VAT threshold if higher) and exit limit (£300,000, or twice the VAT threshold if higher) were removed from 2024 to 2025. A property business is different: it must use traditional accounting if its cash basis receipts exceed £150,000 (ITTOIA 2005 s.271A).
Can I claim capital allowances under the cash basis?
Only on cars, and only if you do not use the simplified mileage rate for that car. Other equipment you buy to keep and use in the business, such as tools, computers and vans, is deducted as an ordinary expense when you pay for it. Some capital spending is not deductible as an expense under the cash basis, including land and buildings, cars (which get capital allowances instead) and assets not expected to wear out or lose 90% of their value within 20 years.
What happens if I switch from the cash basis to traditional accounting?
You work out a transitional adjustment so nothing is taxed twice or missed. Money owed to you and stock you had paid for at the end of the last cash basis year, less what you owed suppliers and income received in advance, gives the adjustment. A positive figure is taxed over 6 years, one sixth a year, unless you elect to bring more in sooner; a negative figure is deducted in full in the first year.