Quick answer
Cash basis accounting taxes you on money actually received and paid out in the year, while traditional accounting taxes you on income earned and costs incurred, even if unpaid. Cash basis is now the default for most sole traders.
Updated October 2026 · Figures based on 2025/26 rates
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How cash basis works
You record income when it hits your account and expenses when you pay them. It is simple, and you do not pay tax on invoices not yet paid.
How traditional accounting works
Also called accruals, it counts invoices raised and bills received in the period they relate to, and requires stock and debtor adjustments.
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Which suits you
Cash basis suits small, service-based businesses. Traditional accounting may suit those with large stock, loans or seasonal working capital needs.
Changing method
You can switch between methods, but you must make adjustments to avoid income or costs being counted twice or missed.
The core difference between the two methods
Both methods arrive at the same thing, your taxable profit, but they decide which year each item belongs to in different ways. Under cash basis you record income when money actually reaches you and expenses when you actually pay them. Under traditional (accruals) accounting you record income when you earn it, usually when you issue an invoice, and expenses when you incur them, whether or not the cash has moved. The gap between the two methods is therefore all about timing: unpaid invoices, unpaid bills, stock and work in progress.
For many small sole traders and partnerships, cash basis is now the default way of working out profit, and you can choose to opt out and use traditional accounting. Check HMRC’s cash basis guidance to confirm how this applies to your business, as certain types of business and certain situations are treated differently.
Worked example: the same business under each method
This is an illustrative example. A sole trader raises invoices totalling £40,000 in the tax year, but £6,000 of those invoices is still unpaid on 5 April. During the year, £5,000 is also received from invoices raised in the previous year. Expenses paid in the year are £10,000, and a further £2,000 of bills relating to the year remain unpaid at year end.
| Item | Cash basis | Traditional accounting |
|---|---|---|
| Income recognised | £40,000 – £6,000 + £5,000 = £39,000 | £40,000 (invoiced in the year) |
| Expenses recognised | £10,000 (paid) | £10,000 + £2,000 = £12,000 |
| Taxable profit | £29,000 | £28,000 |
| Taxable after £12,570 allowance | £16,430 | £15,430 |
| Income tax at 20% | £3,286.00 | £3,086.00 |
| Class 4 NI at 6% | £985.80 | £925.80 |
| Total | £4,271.80 | £4,011.80 |
Here cash basis produces £260 more tax in this particular year, because the previous year’s unpaid invoices arrive while this year’s unpaid invoices are not yet counted. The effect reverses over time; in a year where customers pay more slowly, cash basis would show the lower profit. Remember that this is about timing rather than a permanent saving.
Advantages and drawbacks of cash basis
Cash basis is simple. You do not need to track debtors, creditors or year-end adjustments, and you are never taxed on money you have not received. That is helpful if customers are slow payers or you are just starting out. The drawbacks are that it can give a less accurate picture of how the business is performing, it may be harder to show lenders a true profit figure, and your accounts can fluctuate if large invoices straddle the year end.
When traditional accounting makes sense
Traditional accounting suits businesses that hold stock, carry significant work in progress, borrow money or want management accounts that match income to the costs of earning it. It can also make sense if you expect to be paid late a lot and want losses recognised promptly. If you use this method, you account for stock and amounts owed in both directions at year end. If you switch from one method to the other, adjustments are made so that income is not taxed twice or missed, so take care at the changeover. Our guides to calculating self-employed profit and to choosing a business year end help you plan this.
Interaction with allowances and simplified expenses
Whichever method you use, you can claim the £1,000 trading allowance instead of actual expenses if your gross trading income is within it; see how the trading allowance works. You may also use flat-rate deductions such as mileage at 45p for the first 10,000 miles and 25p after that, or the home working flat rates of £10, £18 or £26 a month, as set out in our guide to simplified expenses.
Common mistakes
- Mixing methods within the same business, such as deducting unpaid bills but only counting cash received.
- Forgetting last year’s unpaid invoices when you switch method.
- Counting a deposit or payment in advance in the wrong year.
- Assuming cash basis lowers your tax permanently rather than just shifting timing.
- Failing to keep invoices and bank records that support the figures.
Choosing a method: checklist
- Do you hold stock or have long jobs that straddle the year end?
- Do customers often pay late?
- Will lenders or investors ask for accounts on a traditional basis?
- Have you recorded unpaid invoices and bills at year end?
- Have you checked current HMRC guidance for your type of business?
Self Assessment Tax Return Accountants (SATR) can advise which method fits and then file your return online for a fixed fee from £199 + VAT, using qualified UK accountants. Take a look at our sole trader service.
This article is general information, not personal tax advice.
Frequently asked questions
Is cash basis allowed for any turnover?
Most sole traders and partnerships can use it, and the old turnover cap has been removed, though some businesses are excluded.
Can I claim capital allowances under cash basis?
Generally you deduct capital purchases as expenses, with some exceptions such as cars.
Can I switch from cash basis to traditional accounting?
Yes, generally you can opt out and use traditional accounting, but adjustments are required at the changeover so that income and expenses are not counted twice or missed. Check current HMRC guidance before switching.
Does cash basis change how much tax I pay overall?
Not in the long run. It changes which year income and expenses fall into, so your tax in individual years can be higher or lower, but total profit over the life of the business is the same.
Which method do I choose for the trading allowance?
The £1,000 trading allowance applies whichever method you use. It replaces actual expenses, so it only helps where your gross trading income is low and your real expenses are less than £1,000.
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The bottom line
Cash basis taxes you on money actually received and paid, while traditional accounting taxes you on income earned and costs incurred. Cash basis is now the default for most sole traders and suits simple, service-based businesses; traditional accounting suits those with stock, loans or complex year-end adjustments. Whichever you use, keep good records and take care at the changeover so nothing is counted twice or missed.
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