Answers · UK 2025/26
Should I use the cash basis or accruals (traditional) accounting as a sole trader?
The cash basis is now the default for sole traders. You record income when money actually arrives and expenses when you pay them, ignoring unpaid invoices. Accruals accounting records income and costs when they are earned or incurred. Cash basis is simpler and you only pay tax on cash you have received.
Full answer
Since the cash basis became the default, most sole traders record income and expenses only when cash physically moves. You can opt out and use traditional accruals accounting if it suits you, for example if you carry large stock or want to match costs to revenue precisely. Why it matters: under the cash basis you are not taxed on invoices you have raised but not yet been paid for, which protects your cash flow. Under accruals you would be taxed on that income in the year it was earned even if the customer pays late. Worked example: a sole trader invoices GBP 55,000 in 2026/27 but GBP 8,000 remains unpaid at the year end. Under the cash basis, taxable income is GBP 47,000 (money received). After the GBP 12,570 Personal Allowance, GBP 34,430 is taxed at 20% = GBP 6,886, plus Class 4 NI at 6% on GBP 34,430 = GBP 2,065.80. Under accruals you would be taxed on the full GBP 55,000 now, pulling some income into the 40% higher-rate band above GBP 50,270 and raising the bill, even though you have not been paid. The cash basis has historically restricted interest deductions and loss relief, so check whether those affect you. Use the self-employed-tax calculator to compare scenarios, and confirm the current eligibility and any thresholds at gov.uk before choosing.
Try the calculator
This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.