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What is cash basis accounting for sole traders and when should I use it?

Cash basis accounting means you record income when you actually receive payment and expenses when you actually pay them -- not when invoices are raised. From April 2024 it became the default method for sole traders and most partnerships. It simplifies record-keeping and suits businesses with irregular income or payment patterns.

Last updated: 30 June 2026Last reviewed: 30 June 2026How we verify

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Cash basis accounting is a simplified method of working out your taxable profits where income and expenses are recognised when money actually changes hands, rather than when they are invoiced or incurred. **Default from April 2024** Following changes in Finance Act 2024, cash basis became the **default** accounting method for sole traders and partnerships (other than those with corporate partners). You can opt out and use traditional accruals accounting if you prefer. **How it works** - **Income**: recorded when you receive payment, not when you issue an invoice - **Expenses**: recorded when you pay them, not when you receive a bill - Stock: only deducted when sold and paid for - No debtors or creditors in your accounts **Who benefits most?** - Service businesses that invoice at completion and sometimes wait for payment - Seasonal businesses with irregular income - Sole traders with simple finances who want minimal bookkeeping - Businesses that pay bills late or receive payments early **Key advantages** 1. Simpler records -- no need to track debtors and creditors 2. You do not pay tax on income you have not yet received 3. **No limit on loan interest deductions** -- the previous £500 cap on interest deductions under cash basis was removed from April 2024 4. Easier to understand and explain to HMRC **Potential disadvantages** - May not give an accurate picture of profitability in a given period - Not suitable for businesses with significant stock - Cannot use loss relief as flexibly as under accruals - If you opt out and switch to accruals, transitional adjustments are needed **Accruals basis** If your business is growing rapidly, carries significant stock, or you need accurate profit figures for investment decisions, traditional accruals accounting may give a clearer picture -- and you can still choose it by opting out of the cash basis default.