Cash Basis Accounting for Sole Traders 2026/27: The New Default
Cash basis is now the default accounting method for UK sole traders from April 2024. This guide explains how it works in 2026/27, who benefits, and when accruals basis is still better.
From April 2024, cash basis accounting became the default method for UK sole traders and partners. This was a significant change -- previously, cash basis was an optional choice that sole traders had to actively elect. Now, unless you specifically choose the traditional accruals method, you are automatically on cash basis.
For the 2026/27 tax year, this means most sole traders are already using cash basis whether they know it or not. Understanding how it works, what changed in 2024, and when accruals might still be the better option is important for anyone preparing their Self Assessment return.
What Is Cash Basis?
Cash basis is a simple accounting method where:
- Income is recorded when money is received in your bank account
- Expenses are recorded when money is paid out of your bank account
This means your taxable profit closely matches what actually moved through your accounts during the tax year.
Contrast with accruals basis (traditional accounting):
- Income is recorded when it is earned, even if the client has not yet paid
- Expenses are recorded when the cost is incurred, even if you have not paid the supplier yet
For a sole trader with straightforward income and expenses, cash basis is simpler, less error-prone, and avoids paying tax on money you have not yet received.
The 2024 Change: Cash Basis Becomes the Default
Before April 2024, cash basis was an optional method available to sole traders with turnover below a threshold (previously set at £150,000). To use it, you had to actively opt in on your Self Assessment return.
The Finance Act 2024 reversed this completely:
| Before April 2024 | From April 2024 |
|---|---|
| Accruals was the default | Cash basis is the default |
| Must opt in to cash basis | Must opt out if you want accruals |
| Interest deduction capped at £500 | Full interest deduction allowed |
| Available below turnover limit | No turnover limit to remain on cash basis |
This simplification means most small sole traders no longer need to make an active decision -- they are on cash basis automatically.
The Interest Deduction Change
One of the most significant practical changes in the 2024 reform was the removal of the £500 cap on interest deductions under cash basis.
Under old cash basis rules: A sole trader who paid £2,000 in interest on a business overdraft could only deduct £500 against their profits.
Under new default cash basis rules: The same sole trader can deduct the full £2,000 in interest paid during the tax year.
This removed one of the main reasons businesses preferred accruals basis. Businesses with significant financing costs can now remain on cash basis without losing out on interest deductions.
A Practical Timing Example
This is the key scenario where cash basis and accruals produce different results:
Sole trader invoices a client £5,000 on 28 March 2027 for work completed in March. The client pays on 15 April 2027.
| Cash basis | Accruals basis | |
|---|---|---|
| When is £5,000 income taxed? | April 2027 -- in 2027/28 tax year | March 2027 -- in 2026/27 tax year |
| Which return does it appear on? | 2027/28 Self Assessment | 2026/27 Self Assessment |
| Payment due date | January 2029 | January 2028 |
If the sole trader is in the higher-rate band in 2026/27 but plans to be in basic rate in 2027/28, deferring this income by one year saves 20% on £5,000 = £1,000 in tax.
Use the income tax calculator to model the impact of different income timing scenarios
Who Benefits Most from Cash Basis?
Cash basis suits these types of sole trader particularly well:
Service businesses with no stock:
- Consultants, coaches and trainers
- Tradespeople (electricians, plumbers, decorators)
- Freelance writers, designers, developers
- Therapists and health practitioners
For these businesses, income equals money received and expenses equal money paid. There is no stock, no work in progress, and no complex timing differences to manage.
Sole traders with slow-paying clients: If you routinely issue invoices in one tax year but get paid in the next, accruals basis would tax you on unpaid income. Cash basis eliminates this problem.
Irregular or seasonal income: Cash basis naturally smooths out some timing issues for businesses with highly variable income patterns.
When Accruals Basis Is Still Better
There are situations where the traditional accruals basis remains more suitable:
Large stock or work in progress: If you hold significant stock or have long-term contracts with work in progress at year end, accruals provides a more accurate picture of trading performance and may be required for meaningful accounting records.
Sideways loss relief: Under cash basis, losses can only be carried forward against future profits from the same trade. Under accruals, losses can be set off sideways against other income in the same year (reducing total taxable income) or carried back to earlier years. For a business that incurs a significant loss in its early years alongside other income (such as employment income), accruals could produce a much more favourable tax outcome.
Large businesses: Businesses with turnover consistently above £150,000 may find accruals more appropriate for management accounting purposes, and their bank or investors may require it.
Making Tax Digital and Cash Basis
Making Tax Digital for Income Tax Self Assessment (MTD ITSA) will require quarterly digital reporting of income and expenses:
- From April 2026: sole traders with income over £50,000
- From April 2027: sole traders with income over £30,000
- Later years: further thresholds
Cash basis is fully compatible with MTD ITSA. Quarterly updates report income received and expenses paid in each quarter -- exactly how cash basis works. MTD-compatible software (such as QuickBooks, Xero or FreeAgent) supports cash basis reporting natively.
If you are preparing for MTD ITSA, adopting cash basis now alongside compliant software is a sensible step.
Switching From Accruals to Cash Basis
If you were previously using accruals basis (as most sole traders were by default before April 2024) and are now on cash basis, a transitional adjustment may be needed to avoid double-counting:
Income double-counting example: You invoiced £3,000 in March 2024, included it in your 2023/24 accruals return, and received payment in May 2024. When you move to cash basis in 2024/25, you must not include this £3,000 again.
HMRC provides transitional adjustment rules to handle these situations. If your tax return for the transition year looks complex, seek guidance from an accountant familiar with the changeover.
Summary: Cash Basis in 2026/27
- Default method for all UK sole traders from April 2024
- Records income when received, expenses when paid
- Full interest deduction allowed (no £500 cap)
- Simpler than accruals for most small businesses
- Losses can only be carried forward (not sideways)
- Fully compatible with MTD ITSA from April 2026
- Elect out on your Self Assessment return if accruals is better for your business
Calculate your self-employed tax with different profit scenarios
Frequently asked questions
What is cash basis accounting for sole traders?
Cash basis accounting means you record income when you actually receive the money and record expenses when you actually pay them. This is different from the traditional accruals basis (also called traditional accounting), where you record income when you earn it (even if unpaid) and expenses when the cost is incurred (even if not yet paid). Cash basis is simpler, more closely mirrors your bank account, and avoids you paying tax on income you have not yet received.
Is cash basis now the default for sole traders?
Yes. From 6 April 2024 (the 2024/25 tax year onwards), cash basis became the default accounting method for self-employed sole traders and partners in trading partnerships under the Finance Act 2024. Previously it was an opt-in choice. Sole traders who want to use the accruals (traditional accounting) basis must now actively elect to do so on their Self Assessment return. Most small sole traders will benefit from remaining on cash basis without any action required.
Can sole traders still use traditional accruals accounting?
Yes. Sole traders can elect to use the accruals (traditional accounting) basis on their Self Assessment tax return. This election is made annually. The accruals basis is generally more suitable for larger businesses with significant stock, work in progress, long-term contracts, or where income and expenses frequently fall in different tax years. Businesses with annual turnover consistently above £150,000 may also find accruals more appropriate. An accountant can advise on which method suits your specific business.
How does the interest deduction work under the new cash basis rules?
Under the old optional cash basis rules, there was a cap of £500 on interest deductions per year. The Finance Act 2024 removed this cap for the new default cash basis. From April 2024, sole traders on cash basis can deduct the full amount of interest paid on business loans and overdrafts as a business expense, with no monetary limit. This makes cash basis more attractive for businesses that rely on financing, removing one of the main reasons to prefer accruals basis.
Who benefits most from using cash basis?
Cash basis suits most small sole traders, particularly: service businesses with no stock (consultants, tradespeople, freelancers), sole traders with irregular or delayed payment patterns, businesses where clients frequently pay slowly, anyone who finds traditional accounting complex or confusing, and businesses with straightforward expenses that are paid promptly. It is less suitable for businesses with significant stock, work in progress, capital assets requiring complex capital allowance calculations, or those with substantial business borrowing where loss relief flexibility matters.
What is the difference in taxable profit between cash basis and accruals?
The difference is timing. Under cash basis, income invoiced in March 2027 but paid in April 2027 is taxable in 2027/28. Under accruals, the same income is taxable in 2026/27 when the work was done. If you are in the higher-rate tax band in 2026/27 but expect to be in the basic-rate band in 2027/28, cash basis defers the tax to a lower rate. The same logic applies to expenses -- accruals lets you deduct an unpaid invoice sooner, cash basis only once paid.
Is cash basis compatible with Making Tax Digital for Income Tax?
Yes. Cash basis is fully compatible with Making Tax Digital for Income Tax Self Assessment (MTD ITSA), which is being rolled out from April 2026 for sole traders with income over £50,000. Software approved for MTD ITSA supports cash basis reporting. Quarterly updates under MTD ITSA report income received and expenses paid -- a natural fit with cash basis accounting. Sole traders below the £50,000 threshold will follow in later years, but preparing now by using compatible software is advisable.
What are the main drawbacks of cash basis?
Cash basis has some limitations: losses can only be carried forward against future profits from the same trade (not set sideways against other income, and not carried back). Capital allowances work differently -- you can generally deduct the full cost of plant and machinery in the year of purchase rather than using traditional capital allowances. If you switch from accruals to cash basis, a transitional adjustment may be needed. And if you have large unpaid debtors, you may have already paid tax on that income under accruals.
How do I switch from accruals to cash basis?
Under the new rules from April 2024, the default is cash basis, so most sole traders do not need to actively switch. If you were previously on accruals basis and want to move to cash basis, you do so by simply not electing accruals on your next Self Assessment return. A transitional adjustment may be required to avoid double-counting income or expenses that span the changeover. HMRC provides guidance on transitional adjustments. Your accountant can calculate the correct adjustment for your specific circumstances.
Does cash basis affect how I claim for a van or equipment?
Under cash basis, the full cost of buying a van or equipment for your business is generally deductible in the year of purchase (as an allowable expense), rather than through capital allowances spread over several years. This is simpler than traditional capital allowances, and for most small sole traders it is also more tax-efficient. However, if you sell the asset later, you may need to account for proceeds received. Vehicles with any private use have the private element excluded -- only the business proportion is deductible.
Try the calculators
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