Cash Basis vs Accruals Accounting: The Threshold and Switching Rules (2026/27)
Most sole traders can now use cash basis accounting regardless of turnover, but the choice still has real tax timing consequences. Here's how the rules work for 2026/27 and when accruals is still the better fit.
The threshold change that mattered
Before April 2024, cash basis was only available to sole traders and partnerships with turnover below £150,000 (with a £300,000 exit threshold). From the 2024/25 tax year onward, this entry threshold was removed entirely, and cash basis became the default accounting method for eligible unincorporated businesses of any size, unless the business specifically elects to use accruals accounting instead.
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Open Self-Employed Tax calculatorThis is a significant simplification for growing sole trader businesses that previously had to switch from cash basis to accruals as they crossed £150,000 turnover — often at exactly the point their bookkeeping was becoming more complex anyway.
Cash basis vs accruals: the mechanical difference
| Event | Cash basis | Accruals |
|---|---|---|
| You invoice a client in March, get paid in May | Income recognised in May (when paid) | Income recognised in March (when invoiced) |
| You receive a supplier bill in March, pay it in April | Expense recognised in April (when paid) | Expense recognised in March (when incurred) |
| Year-end debtors/creditors | Ignored — only actual cash flows count | Recognised as assets/liabilities affecting the year's profit |
Worked example: the tax year timing effect
Suppose a sole trader invoices a large client for £15,000 of work completed in March 2026, but isn't paid until June 2026.
| Method | Which tax year is the £15,000 taxed in? |
|---|---|
| Cash basis | 2026/27 (the year payment was received) |
| Accruals | 2025/26 (the year the work was invoiced/completed) |
This timing difference can genuinely matter — for example, if your income (and therefore tax band) varies significantly between years, or if you're trying to manage which tax year a large payment falls into for cash flow or planning purposes.
Why cash basis appeals to most sole traders
For the majority of small, straightforward sole trader businesses, cash basis offers real simplicity:
- Easier record-keeping — you only need to track money actually received and paid, not debtors, creditors, and accruals.
- Better cash flow alignment — you're never taxed on income you haven't actually received yet, which matters if a client pays late or not at all.
- Simplified expenses compatible — cash basis works naturally alongside the flat-rate simplified expenses rules for mileage and use of home.
- No bad debt complications — if a client never pays, you simply never recognise that income under cash basis; under accruals, you'd need to separately write off the bad debt.
Why some businesses still choose accruals
Accruals accounting remains the right choice for some sole traders and partnerships, particularly those with:
- Significant stock or work-in-progress — accruals better matches the cost of goods sold to the revenue they generated.
- Complex capital allowance claims — the cash basis simplified capital allowance rules restrict some claims (particularly around cars and certain larger assets) compared with full capital allowances under accruals.
- Plans to seek investment or incorporate soon — accruals-based accounts are generally what lenders, investors, and later a limited company's own accounts will need to show, so some businesses prefer to build the habit early.
- A desire for a clearer year-to-year profitability picture — matching income and expenses to the period they relate to, rather than when cash moved, can better reflect the underlying trading performance in businesses with irregular payment timing.
| Feature | Cash basis | Accruals |
|---|---|---|
| Turnover limit | None (since April 2024) | None |
| Available to limited companies | No | Yes (mandatory) |
| Simplified expenses compatible | Yes | Yes (separately available) |
| Full capital allowances (all asset types) | Restricted | Full range available |
| Debtors/creditors tracked | No | Yes |
| Bad debt relief mechanism | Simply don't recognise unpaid income | Formal write-off adjustment |
Switching between methods
Moving from cash basis to accruals (or vice versa) requires a transitional adjustment calculation, designed to ensure income and expenses aren't counted twice or missed entirely in the year of the switch. For example, if you switch from cash basis to accruals, outstanding invoices you'd already earned but not yet been paid for under cash basis need to be brought into account carefully to avoid double taxation once accruals starts recognising them again on an earned basis.
Use our self-employed tax calculator and sole trader take-home calculator to model your tax position under either accounting method's income recognition timing.
Frequently asked questions
Is there still a turnover limit for using cash basis accounting?
No. Since April 2024, the previous £150,000 entry threshold for cash basis was removed, and cash basis is now the default method for most unincorporated businesses (sole traders and partnerships), available regardless of turnover, unless you actively elect to use accruals accounting instead.
What's the practical difference between cash basis and accruals?
Cash basis recognises income when you're actually paid and expenses when you actually pay them. Accruals accounting recognises income when it's earned (invoiced) and expenses when they're incurred, regardless of when cash physically changes hands — this can shift which tax year a transaction falls into.
Can limited companies use cash basis accounting?
No. Cash basis is only available to unincorporated businesses — sole traders and partnerships (where all partners are individuals). Limited companies must always use accruals accounting under UK company law and accounting standards.
Why would a sole trader choose accruals over cash basis if both are allowed?
Accruals accounting can better match income and expenses to the period they relate to, which some businesses find gives a clearer picture of profitability, and it's required if you want to claim certain reliefs (like some capital allowances beyond the cash basis simplified rules) not fully available under cash basis.
Can I switch between cash basis and accruals each year?
You can switch, but there are specific transitional adjustment rules to prevent income or expenses being counted twice (or missed entirely) in the year you switch, so it's not something to do casually without understanding the transition calculation.
Try the calculators
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