Answers · UK 2025/26
How does cash basis accounting work for sole traders?
Cash basis means you record income when received and expenses when paid, rather than when invoiced. It simplifies record-keeping for small self-employed businesses.
Full answer
Under cash basis accounting, sole traders and partnerships (with turnover up to £150,000) recognise income in the tax year the cash is actually received and expenses in the year the cash is actually paid. This differs from traditional accruals accounting, where income and expenses are matched to the period they relate to. Cash basis became the default method for most sole traders from 2024/25 unless you opt out. It simplifies Self Assessment as you do not need to account for debtors, creditors, or prepayments. However, there are restrictions: you cannot claim capital allowances on most assets (you deduct the full cash cost instead, up to the simplified expenses rules); interest deductions are capped at £500 per year; and losses cannot be carried back or set against other income (only carried forward). Farmers and creative artists may find accruals accounting more beneficial.
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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.