Cash Basis vs Accruals for Sole Traders 2026/27: Which to Choose

What the two methods actually mean

Every sole trader has to decide how to measure profit. The two options are the cash basis and accruals (also called traditional) accounting. The method you pick changes which year a sale or cost lands in, and therefore how much tax you pay and when.

Under the cash basis you record income when the money reaches you and expenses when you actually pay them. Under accruals you record income when you raise the invoice and expenses when you receive the bill, regardless of when cash changes hands.

For 2026/27 the cash basis is the default for most unincorporated businesses. If you want accruals you opt out on your Self Assessment return.

A worked example

Imagine you are a self-employed designer. In March 2027 you invoice a client GBP 8,000 for finished work, but they do not pay until May 2027, which falls in the next tax year.

• On the cash basis, that GBP 8,000 counts as 2027/28 income because that is when you were paid.
• On accruals, the GBP 8,000 counts as 2026/27 income because that is when you invoiced it.

Say your other 2026/27 profit is GBP 45,000. On the cash basis your taxable profit stays at GBP 45,000. On accruals it rises to GBP 53,000, pushing GBP 2,730 over the GBP 50,270 higher-rate threshold.

That slice over GBP 50,270 is taxed at 40% income tax plus 2% Class 4 National Insurance, instead of 20% plus 6%. The cash basis defers the tax on that invoice by a full year simply by following the cash.

When the cash basis tends to win

The cash basis suits many smaller, simpler businesses:

• You are paid in arrears and want to avoid paying tax on money you have not received.
• You have few or no stock, debtors or work-in-progress to track.
• You want simpler bookkeeping with less reliance on an accountant.
• Your income is below the level where complex relief planning matters.

When accruals can be the better fit

Accruals accounting is often preferable when:

• You carry significant stock or have large unpaid invoices at year end.
• You want a true picture of profitability for lenders or a future incorporation.
• You have losses you want to set against other income in a more flexible way.
• You make large equity-style investments where accruals capital allowances rules help.

Watch the transition

If you switch methods, you must make adjustments so that no income or expense is counted twice or dropped. For example, an invoice already taxed under accruals should not be taxed again when the cash arrives under the cash basis. Keep a clear record of the changeover year and the adjustment you made.

Whichever method you use, your final profit feeds the same tax stack for 2026/27: a Personal Allowance of GBP 12,570, basic-rate income tax at 20% up to GBP 50,270, then 40% above, with Class 4 NI of 6% and then 2% on the same profit bands.

The bottom line

For most straightforward sole traders, the cash basis is simpler and can defer tax on unpaid invoices. Businesses with stock, debtors or growth ambitions often get a clearer and more flexible result from accruals. Neither is universally better; it depends on your timing of income and your plans.

To estimate the income tax and Class 4 NI on each profit figure, try the calchub.uk self-employed tax calculator, and confirm the current rules and any transition adjustments on gov.uk before you file.