What is Cash Basis Accounting? How It Works and Who Can Use It

When you run your own business, the last thing you want is to spend hours wrestling with complicated accounting. Cash basis accounting is designed to make things simpler.

Instead of tracking invoices raised and bills received, you just record money when it comes in and money when it goes out, exactly as it appears in your bank account. For most self-employed and landlords, it is the most common way to keep on top of their finances and complete their Self Assessment tax return without needing an accounting qualification.

This page explains how cash basis accounting works, who can use it, what changed in April 2024, and how it fits with Making Tax Digital.

Who can use Cash Basis Accounting?

Cash basis accounting is available to:

• Sole traders
• Self-employed freelancers and contractors
• Landlords with UK or overseas rental income
• Partnerships without corporate partners

Who cannot use cash basis:

• Limited companies
• Limited liability partnerships (LLPs)
• Partnerships with one or more corporate partners
• Lloyd’s underwriters
• Businesses with certain specialist tax elections (see GOV.UK for the full list)

If you run more than one business, you can choose a different accounting method for each one. Check GOV.UK for the full eligibility rules.

Cash Basis Changes from the 2024–25 Tax Year

From 6 April 2024, several significant changes were made to cash basis accounting:

• Cash basis is now the default for eligible self-employed and partnerships. You no longer need to opt in — you are automatically using it unless you choose to opt out.
• The turnover threshold has been removed. Previously, you could only use cash basis if your turnover was under £150,000. That limit no longer applies.
• The £500 cap on interest deductions has been removed. You can now deduct loan interest and finance costs in full.
• Losses can now be offset against other taxable income, making the cash basis more flexible for small businesses that incur losses.
• Multiple businesses can each use a different accounting method.

To opt out and use traditional (accrual) accounting instead, tick the relevant box on your Self Assessment tax return.

What is Cash Basis Accounting?

Cash basis accounting is a method of recording your small business income and expenses based on when money actually changes hands.

• You record income when you receive payment — not when you raise an invoice
• You record expenses when you pay them — not when you receive a bill

📌 Examples of cash basis accounting: You send a client an invoice for £2,000 in March. They pay in April. Under cash basis, you record the £2,000 in April — the month the money arrives in your bank account. Under traditional (accrual) accounting, you would record it in March when the invoice was issued.

You receive a bill from your supplier for £500 of materials in March. You pay it in April. Under cash basis, you record the £500 as an expense in April — the month the money leaves your bank account. Under traditional (accrual) accounting, you would record it in March when the bill was received.

This approach makes cash basis very straightforward to operate, especially if you manage your accounts from your bank statements.

Advantages of Cash Basis Accounting

Simplicity: Recording transactions when money moves in or out of your bank account is intuitive and easy to follow, even without an accounting background.

Accurate cash position: Your records reflect the money you actually have, making it easier to monitor day-to-day cash flow.

Tax timing: You only pay Tax on money you have actually received. If a client has not paid you, you are not taxed yet.

Lower bookkeeping costs: The simplicity of cash basis often means less time spent on bookkeeping, which can reduce costs if you use an accountant or bookkeeper.

No turnover limit: Since April 2024, any eligible sole trader, self-employed person, or landlord can use cash basis regardless of their turnover.

Disadvantages of Cash Basis Accounting

• Profit figures can be misleading. Because income is only recorded when received, your profit and loss account may not reflect the true trading position of the business at any point in time.
• Harder to secure finance. Banks and lenders often prefer accounts prepared on the accrual basis, as it gives a clearer picture of what the business is owed and owes.
• Stock and inventory. Purchases of stock are recorded when paid for, not when the goods are used or sold, which can distort your cost of sales.
• May not suit complex businesses. If your business has high levels of debtors, creditors, or stock, traditional accounting gives a more accurate financial picture.

Free Excel cash book

If you want to record your accounts on a cash basis, our free Excel cash book template is a straightforward way to get started. Enter your income and expenses from your bank statements, check your bank balance, and view your profit and loss for the year.

⚠️ Warning: If you use a spreadsheet for your records and your qualifying gross income is above the Making Tax Digital for Income Tax thresholds (over £50,000 from April 2026, over £30,000 from April 2027, over £20,000 from April 2028), Excel alone will not be sufficient for your quarterly MTD submissions. You will need to digitally link your spreadsheet to MTD-compatible bridging software or switch to a full accounting software package.

What Records do you Need to Keep under Cash Basis?

One of the advantages of cash basis is that your record-keeping requirements are simpler than under traditional accounting. You do not need to track what you are owed or what you owe — you just need to record money in and money out.

You need to keep records of all sales and income, all business expenses, VAT records if you are registered for VAT, and PAYE records if you employ people.

As proof of your transactions, you should keep:

• Receipts for goods and stock purchased
• Bank statements and chequebook stubs
• Sales invoices, till rolls, and paying-in slips

You do not need to send your records to HMRC when you submit your tax return, but you need to keep them so you can work out your profit or loss and show them to HMRC if asked. You need to keep all records for at least five years after the Self Assessment deadline for the relevant tax year.

Cash accounting for VAT

HMRC offers a separate VAT cash accounting scheme for VAT-registered businesses. This differs from cash-basis accounting for self-assessment purposes.

Under the VAT cash accounting scheme:

• You pay VAT to HMRC when your customer pays you — not when you raise the invoice
• You reclaim VAT on purchases when you pay your supplier — not when you receive the bill
• The scheme is available to businesses with a taxable turnover of £1.35 million or less

Note that Making Tax Digital for VAT applies to all VAT-registered businesses regardless of turnover, including those voluntarily registered below the £90,000 registration threshold. All VAT returns must be submitted using MTD-compatible software.

What is accrual (traditional) accounting?

Accrual accounting records income when it is earned and expenses when they are incurred — regardless of when the money actually moves.

• An invoice raised in March is recorded in March, even if payment arrives in April
• A bill received in March is recorded in March, even if you pay it in April

This gives a more accurate picture of the business financial health over a period, but requires more detailed record-keeping.

Cash basis vs accrual accounting

The key difference is timing — when transactions are recorded.

	Cash basis	Accrual (traditional)
Income recorded	When payment is received	When invoice is raised
Expenses recorded	When payment is made	When bill is received
Tax	Based on cash received and paid	Based on transactions as they occur
Suitable for	Sole traders, self-employed, landlords	All businesses; required for limited companies
Financial picture	Reflects actual cash position	Reflects trading position more accurately

Example: the same month, two different profit figures

A self-employed computer consultant has the following transactions in a month:

• Receives £1,000 from a previous month’s invoice
• Issues a new invoice for £5,000, unpaid at month end
• Pays a subcontractor £250 for last month’s work
• Receives a new subcontractor invoice for £300, unpaid

	Cash basis	Accrual method
Income	£1,000	£5,000
Subcontractor cost	£250	£300
Net profit	£750	£4,700

The same month’s activity produces very different profit figures depending on the method used. Neither is wrong — they are simply measuring different things.

Capital allowances and cash basis

One of the biggest practical differences between cash basis and traditional accounting is how you handle the cost of equipment and assets you buy for the business.

Under cash basis, you claim the full cost of most equipment — computers, tools, machinery, furniture — as a straightforward business expense in the year you pay for it. You do not need to spread the cost over several years or make a separate capital allowances claim. This is simpler and often means you get tax relief sooner.

Cars and vans are treated differently. If you buy a car or van for business use, you cannot expense the full purchase cost as a normal business expense. Instead, you claim it as a capital allowance in the normal way — unless you use HMRC’s simplified mileage rates, in which case the mileage rate covers the running and ownership costs of the vehicle, and you cannot claim capital allowances on it as well.

Under traditional accounting, businesses use capital allowances — including the Annual Investment Allowance (AIA), which allows up to £1 million of qualifying plant and machinery costs to be deducted in the year of purchase. Cash basis users do not need to worry about this for most equipment, as the full cost is simply expensed, but it is worth being aware of if you are comparing the two methods or considering switching.

📌 Example: You buy a new laptop for £800 for your business. Under cash basis, you record the £800 as a business expense in the year you pay for it and get tax relief on the full amount straight away. Under traditional accounting, you would typically claim it through capital allowances.

⚠️ Warning: If you are currently claiming capital allowances on equipment and you switch to cash basis, there are transitional rules to follow. HMRC’s help sheet HS222 covers what adjustments you need to make. Always check GOV.UK before switching accounting methods.

How to change from cash basis to accrual accounting

If you decide to switch to traditional accounting, here is what is involved:

1. Choose a transition date — typically the start of a new tax year or accounting period
2. Record unpaid invoices as accounts receivable (income earned but not yet received)
3. Record unpaid bills as accounts payable (expenses incurred but not yet paid)
4. Adjust for stock and inventory — record the value of unsold stock as an asset
5. Start depreciating fixed assets over their useful life, rather than expensing them immediately
6. Reconcile your accounts to make sure everything is accurate
7. Note the change on your Self Assessment return — you will need to indicate that you are using traditional accounting

Switching can be time-consuming, and you may want to speak to an accountant before making the change.

Making Tax Digital and cash basis accounting

Making Tax Digital for Income Tax is being introduced in phases for sole traders and landlords. Cash basis record-keeping is compatible with MTD requirements.

Phase	Date	Qualifying income threshold
Phase 1	6 April 2026	Over £50,000
Phase 2	6 April 2027	Over £30,000
Phase 3	6 April 2028	Over £20,000 (confirmed October 2024 Autumn Budget)

Qualifying income means gross income (before expenses) from self-employment and property rental combined. Money from PAYE employment, dividends, or pensions does not count.

Under MTD for Income Tax, you will need to:

1. Keep digital records of income and expenses
2. Submit quarterly updates to HMRC — four times per year, by 7 August, 7 November, 7 February, and 7 May
3. Submit a Final Declaration after the year-end, replacing the traditional Self Assessment tax return

Good news for cash basis users: If your turnover is below the VAT registration threshold (currently £90,000), you can report simplified totals, total income and total expenses, per quarter, rather than itemised categories. This aligns well with the straightforward nature of cash basis record-keeping.

💡 Tip: Using MTD-compatible accounting software such as Sage UK, Xero or QuickBooks now — even if you are not yet within the mandatory MTD thresholds — means you will be ready when your start date arrives. It also makes quarterly updates and the Final Declaration straightforward, as the software handles submissions automatically.

Accounting Software for Cash Basis Users

If you are moving away from spreadsheets or want to be MTD-ready, cloud accounting software makes cash basis record-keeping straightforward. All three packages below are MTD-compatible for both VAT and Self-assessment.

Cash Basis Method FAQ

Summary

• Cash basis accounting records income when received and expenses when paid
• It is the default method for eligible sole traders, self-employed people, landlords, and most partnerships from the 2024–25 tax year onwards
• Limited companies cannot use cash basis — they must use traditional (accrual) accounting
• There is no longer a turnover threshold — the old £150,000 limit was removed from April 2024
• You can opt out and use traditional accounting if it suits your business better
• Cash basis is compatible with Making Tax Digital for Income Tax requirements
• If your qualifying income is over £50,000, you will need MTD-compatible software from April 2026
• Always check GOV.UK for the latest rules

Related pages on Business Accounting Basics

• Accrual basis accounting
• Cash vs accrual accounting
• Free Excel cash book template
• Self-employed bookkeeping
• Making Tax Digital
• Best accounting software
• VAT

Last updated: May 2026