Tax and NI
Cash basis accounting for sole traders
Since 6 April 2024 a sole trader’s profit is, by default, the money that came in less the money that went out.
On the cash basis, a freelance developer who received £42,000 and paid £7,500 of costs in 2026/27 is taxed on £34,500 of profit and owes £5,702 of Income Tax and Class 4 in England, Wales or Northern Ireland, even if £6,000 of invoices were still unpaid on 5 April. Under traditional accounting the same year, with £900 of bills not yet settled, would show £39,600 and a bill of £7,028. Cash basis has been the standard method for sole traders and for partnerships without corporate partners since 6 April 2024: you record income when the money arrives and expenses when you pay them, so you never pay Income Tax on money you have not received. It does not remove tax, it moves it to the year the cash lands. Limited companies, limited liability partnerships and a short list of specialist trades cannot use it. If you prefer traditional accounting, you can choose it but must say so on your return. The calculator below compares both methods on your own figures.
Cash basis or traditional accounting: profit for the year
Profit on the cash basis
£34,500
| Traditional accounting | £39,600 |
| Difference taxed later or now | £5,100 |
Figures checked by Radif Partners · Editorial policy · How we calculate
From optional scheme to default
For years the cash basis was something small businesses had to opt into, with a turnover ceiling. From 6 April 2024 it became the default way for sole traders and partnerships with no corporate partners to work out profit, and the turnover limit went with the old rules. In practice this means that if you do nothing special, keep a record of what was paid in and paid out, and fill in the return from those records, you are using it. Traditional accounting, where income and costs are dated by invoice and bill, is now the one you choose deliberately.
When income counts
Income goes in the year you receive it, in whatever form: bank transfer, card, cash, cheque or payment in kind. Money you are owed does not count until it arrives. You can choose which date you treat as the date of receipt, for example the day money reaches your account or the day a cheque is written, but you must stick to the same method from one return to the next. A photographer who invoices a wedding on 28 March and is paid on 12 April records that income in the new tax year, not the old one.
When costs count
Expenses follow the same logic: only what you have actually paid comes off. A bill received in March but settled in April belongs to the next year. The usual allowable costs apply, from fuel and stationery to interest on an overdraft, and you can still use the flat-rate simplified expenses for a vehicle, home working or living at your business premises. The allowable expenses guide lists what counts.
Two years compared
Take an interior designer whose clients are slow to pay. In the first year she receives £52,000, has £8,000 outstanding at the year end, pays £11,000 of costs and owes suppliers £1,200. In the second year she receives £58,000, including the old £8,000, ends with £3,000 unpaid, pays £12,500, which covers the £1,200 left over from the first year, and owes £600 when the second year closes.
| Cash basis profit | Bill | Traditional profit | Bill | |
|---|---|---|---|---|
| Year 1 | £41,000 | £7,392 | £47,800 | £9,160 |
| Year 2 | £45,500 | £8,562 | £41,100 | £7,418 |
The cash basis taxes less in year one and more in year two, because the late £8,000 lands in the second year. Over the two years the cash basis counts £86,500 of profit and traditional accounting £88,900; the remaining £2,400 is simply the money still outstanding at the end of year two, less the supplier bills not yet paid, and it will be taxed when it moves. What the method changes is when tax is paid, and it lines the bill up with the money actually in the bank, which is its main attraction for a small business without a finance team. Timing can still change the total when a shift of income moves profit across a threshold in one year but not the other, such as the higher rate at £50,271 or the £100,000 taper.
Keeping cash records day to day
The method rewards a simple routine. A separate bank account for the business makes the bank statement do most of the work, because each payment in and out already carries a date. Choose your date convention once, note it, and use it every year. Keep the invoices you send even though they are not what triggers tax, since they show which payments relate to the business and help you chase late payers. On the cost side, keep the receipt or bill for each payment and note what it was for, especially where something is partly private. At the year end there is no stock count and no list of debtors to prepare unless you have chosen traditional accounting.
Who cannot use it
The cash basis is closed to limited companies, limited liability partnerships and partnerships that have a company as a partner. It is also unavailable to Lloyd’s underwriters, farming businesses with a current herd basis election, farming or creative businesses with a profit averaging claim, businesses that have claimed business premises renovation allowance in the previous seven years, mineral extraction trades and any business that has ever claimed research and development allowance. Those businesses use traditional accounting and say so on the return.
Why some choose traditional accounting anyway
GOV.UK gives two everyday reasons. A business holding a lot of stock may find the cash figures jump around depending on when it restocks, and a business seeking a loan may be asked by the lender for accounts that show what it owes and is owed. A handful of specialist rules also only work under traditional accounting, covering cases such as dealing in securities, mineral royalties, lease premiums, ministers of religion, pool betting duty, intermediaries treated as making employment payments, managed service companies, waste disposal, and cemeteries and crematoria. Traditional accounting means more record keeping, since you have to track debtors and creditors at the year end. Someone with several businesses can choose the method separately for each one.
Equipment and cars
One of the practical attractions of the cash basis is that most things you buy to keep, such as a laptop, tools, machinery or a van, are deducted as normal expenses in the year you pay for them, instead of through capital allowances. Cars keep their own rule: the purchase is claimed through capital allowances, unless you use the flat mileage rate for that car, in which case the rate covers buying and running it. If you are moving from capital allowances to the cash basis, GOV.UK points to adjustments you may have to make.
Under traditional accounting an invoice counts as income when issued, so a customer who never pays leads to a bad debt claim. On the cash basis that problem does not arise: the money was never recorded, so it was never taxed.
VAT, records and your tax payments
A VAT-registered sole trader on the cash basis can keep figures including or excluding VAT, as long as income and costs are treated the same way. Records do not go to HMRC with the return, but they must be kept in case of a check. Because the bill is worked out on cash profit, the payments on account that follow are based on it too: a year in which several large invoices slip past 5 April gives a smaller bill now and larger advance payments later. Source: GOV.UK, Cash basis.