What is the cash basis for sole traders?

The cash basis means you count income when the money arrives and costs when you pay them. Since the 2024-25 tax year it has been the default for sole traders, with no turnover limit.

It is the way most tradespeople already think: what came in, what went out. The alternative, traditional accounting, counts work when you invoice it and bills when you receive them. The rules below follow GOV.UK and HMRC's Business Income Manual as checked on 16 October 2026.

How the cash basis works

GOV.UK says you only record income or expenses when you receive money or pay a bill. All payments count, whether by cash, card, cheque, bank transfer or payment in kind. Money you are owed but have not been paid is left out, so you do not pay Income Tax on a job until the customer pays.

You choose how you date a payment, for example the day it reaches your account or the day a cheque is written, but you must use the same method every year. There is no need to count debtors, creditors, stock or work in progress at the year end.

Cash basis and traditional accounting compared

What changed from April 2024

Before 2024-25, you had to opt in, and only if your turnover was £150,000 or less. You had to leave once it passed £300,000. The government's policy paper says three restrictions were removed from 2024-25:

• Turnover limits. Gone. A sole trader of any size can use the cash basis.
• Interest. The old cap of £500 a year on interest and finance costs was removed. Any amount can be deducted if it is incurred wholly and exclusively for the trade.
• Losses. Cash basis losses used to be carried forward against later profits of the same trade, or used when the business stopped. They can now be set against other income of the same year, or carried back to earlier years, under the same loss rules as traditional accounting.

Worked example

An electrician invoices £48,000 of work in the 2026-27 tax year. £3,000 of March 2027 invoices are paid in April 2027. £2,500 for March 2026 jobs arrived in April 2026.

• Cash basis income for 2026-27: £48,000 − £3,000 + £2,500 = £47,500.
• Traditional accounting income (accounts to 5 April): £48,000, because it follows the invoice dates.

The £3,000 is not lost under the cash basis. It is counted in 2027-28, when it was paid.

Who cannot use it

The cash basis is for sole traders and partnerships made up only of individuals. Limited companies, limited liability partnerships and partnerships with a company as a partner cannot use it. Nor can a few specialist trades listed in section 25B of the Income Tax (Trading and Other Income) Act 2005, such as mineral extraction, or a business that has claimed business premises renovation allowance in the last 7 years. If you have more than one business, you can choose the method for each one.

This page is about trading income. Rental income has its own rules.

What this means for you

If you are a sole trader and have never ticked a box about accounting methods, you are almost certainly on the cash basis already. Your records need to show the date each payment came in or went out, and that date decides which tax year, and which quarter, it falls in.

GOV.UK suggests traditional accounting may suit a business with a lot of stock, or one that needs accounts for a bank loan. Most subcontractors and one-person trades have neither. If you switch either way, adjustments may be needed, so think before changing.

If you are VAT registered, the cash basis does not change how you account for VAT. You can record income and costs including or excluding VAT, as long as you treat them the same way.

Steps to check you are using the right method

1. Look at your 2024-25 or later Self Assessment return. If the traditional accounting box was not ticked, you used the cash basis.
2. Check you are not excluded: a limited company, LLP or partnership with a corporate partner cannot use it.
3. Record each payment by the date it was received or paid, and use the same dating method every year.
4. Claim vans, tools and equipment as expenses when you pay for them. Treat a car through capital allowances.
5. If you want traditional accounting, tick the box on every return, and keep the extra records GOV.UK lists, such as money owed to you and stock at the year end.

The free MTD check shows when Making Tax Digital starts for you, and the trades section has more on keeping the books.