Cash Basis vs Accruals Accounting 2026/27: Complete Guide for the Self-Employed

Cash Basis and Accruals Explained

Cash basis accounting recognises income when it is actually received and expenses when they are actually paid, matching your tax return closely to what has moved through your bank account during the year. Traditional accruals accounting instead recognises income when it is earned (typically when you invoice a customer) and expenses when they are incurred, regardless of when the cash actually changes hands.

Since 6 April 2024, cash basis has become the default method for most sole traders completing a Self Assessment return, reversing the previous position where accruals was the default and cash basis had to be actively elected, subject to a turnover limit that has now been removed entirely.

Who Can Use Cash Basis

Cash basis is available to most unincorporated businesses — sole traders and most partnerships of individuals — with no turnover limit following the April 2024 reform. It is not available to limited companies, which must always use accruals (traditional) accounting under UK GAAP or IFRS rules regardless of size.

Certain business types are also excluded from cash basis, including some complex partnerships, businesses with corporate partners, and certain trades where accruals better reflects the underlying economics, such as some farming businesses using herd basis elections.

Key Differences in Practice

• Invoicing vs payment: Under accruals, an invoice raised on 28 March but paid on 15 April falls into the earlier tax year; under cash basis, it falls into the year the payment actually arrived
• Bad debts: Cash basis automatically avoids taxing income you never actually collected, since unpaid invoices are simply never recognised; accruals requires a separate bad debt write-off
• Simplicity: Cash basis generally requires simpler records because it mirrors bank statements, which is a major reason HMRC made it the default for smaller businesses
• Interest and finance costs: Cash basis restricts the deduction for loan interest to £500 a year unless the loan is for specific qualifying purposes

Capital Expenditure and Interest

Under cash basis, most capital expenditure on equipment, tools and vehicles used in the business is deducted in full in the year it is paid for, rather than claimed through capital allowances over several years as under accruals. This can be a significant cash-flow and simplicity advantage for small businesses buying equipment outright.

However, cars are treated differently: they cannot usually be expensed in full under cash basis and instead follow capital allowance rules similar to those used under accruals, reflecting their long-term, often mixed-use nature.

When Accruals Accounting Is Better

Accruals accounting can suit businesses with significant stock, work in progress, or large invoices outstanding at the year end, because it gives a more accurate picture of the underlying trading performance rather than just cash movements. It is also required for limited companies and can be preferable where a business wants to claim loss relief more flexibly, since some loss relief options (such as offsetting trading losses against other income) are restricted under cash basis.

Businesses seeking external finance, such as a mortgage or business loan, sometimes find lenders more comfortable with accruals-based accounts because they show a fuller picture of the business's financial position, including money owed to and by the business.

Worked Example

Fatima runs a small graphic design business as a sole trader. In March 2026, she invoices a client £4,000 for a project completed that month, but the client does not pay until 20 April 2026, the start of the new tax year. Under accruals, that £4,000 would count as income in the 2025/26 tax year; under cash basis, it counts as income for 2026/27, the year the payment actually arrived.

Fatima uses cash basis, which she finds simpler because her tax return matches her bank statements directly, and she does not need to track unpaid invoices separately as debtors on a balance sheet.

Common Pitfalls

• Assuming cash basis is always simpler for tax planning. It can shift income between tax years unpredictably depending on when clients actually pay.
• Forgetting loss relief restrictions. Trading losses under cash basis generally can only be carried forward against future profits of the same trade, not offset against other income in the same way as accruals losses.
• Not checking the £500 interest cap. Loan interest deductions above £500 a year are restricted under cash basis unless the loan qualifies for an exception.
• Switching methods without understanding transitional adjustments. Moving from accruals to cash basis (or back) can require adjustments to avoid double-counting or missing income and expenses.
• Using cash basis for a limited company. Cash basis is not available to limited companies under any circumstances; they must always use accruals accounting.