Answers · UK 2025/26
Should I use Cash Basis accounting for my UK business?
Cash basis lets sole traders record income/expenses when money actually changes hands (not when invoiced). From 2024/25 it's the default for sole traders — simpler than accruals, but can't deduct losses against other income, capital allowances limited to AIA, no full mortgage interest deduction.
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UK Cash Basis accounting for sole traders and partnerships. From 2024/25 onwards, cash basis is the DEFAULT method for sole traders and partnerships (was opt-in previously). Income recorded when received, expenses when paid — simpler than accruals (which match income to period earned). Limits: turnover limit removed in 2024 (was £300,000); capital allowances limited to AIA pool (max £1m/year qualifying); interest on borrowings limited to £500 deduction in accounts (mortgage on rentals still 20% credit basis); cannot offset trading losses against other income (only against future profits of same trade); cannot use Cash Basis if you're a partner in a limited liability partnership taxed as company. Accruals basis still available — must opt in via Self Assessment. Best for: small businesses with simple income; service businesses with low capital expenditure; new businesses where simplification matters. Avoid Cash Basis if: making significant losses you want to relieve elsewhere; have large stock or long debtor cycles; planning major capital investment beyond AIA. Property landlords also have a cash basis option separately. MTD for Income Tax (from 2026) supports both methods.
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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.