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.
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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.
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