Cash Basis vs Accruals for the Self-Employed
Decide whether the cash basis or accruals accounting works better for your self-employed UK business.
When you are self-employed, one of the first decisions that shapes your tax bill is how you record income and expenses. HMRC lets most sole traders choose between the cash basis and traditional accruals accounting. The two methods can produce very different profit figures in any given year, even though, over the life of a business, they tend to even out. Picking the right one affects your cash flow, the timing of your tax, and how much admin you take on. This guide explains both methods, who can use them, and how to decide.
What the cash basis means
The cash basis records money when it actually moves. You count income on the date a customer pays you, and you count an expense on the date you pay it. An unpaid invoice you have raised is not income yet, and a bill you have received but not settled is not an expense yet.
This keeps things simple and intuitive: your taxable profit broadly mirrors what has gone in and out of your bank account. For many freelancers and small sole traders, it removes the headache of tracking debtors and creditors. It is the default starting point for most newly self-employed people, and it pairs naturally with everyday sole trader bookkeeping basics .
What accruals accounting means
Traditional accruals accounting (sometimes called the accruals basis or earnings basis) records income and costs when they are earned or incurred, not when cash changes hands. If you raise an invoice in March, the income belongs to that period even if the customer pays in May. If you receive a supplier bill for work done in your accounting year, you recognise that cost in the same year regardless of when you pay it.
Accruals accounting follows the matching principle used throughout UK GAAP and standards such as FRS 105 for micro-entities. It gives a more accurate picture of business performance over time, which matters if you carry stock, offer credit terms, or plan to grow.
Eligibility for the cash basis
The cash basis is aimed at smaller, simpler businesses. To use it you generally need to be:
- A sole trader or partnership of individuals running a trade.
- Below the relevant turnover ceiling that HMRC sets for entering the scheme.
Some businesses are excluded or find the cash basis impractical, including limited companies, limited liability partnerships, and certain trades with complex finances. The cash basis also restricts how you handle losses and interest, which can be a disadvantage for some.
If you operate through a company instead, accruals accounting is required, and the considerations differ; see our limited company finances hub for more.
Pros and cons of each method
Neither method is universally better. The right choice depends on how you trade and get paid.
| Factor | Cash basis | Accruals basis |
|---|---|---|
| Simplicity | High, follows the bank | Moderate, needs debtor/creditor tracking |
| Tax on unpaid invoices | Not taxed until paid | Taxed when invoiced |
| Bad debts | Naturally excluded | Need a separate adjustment |
| Suits businesses with stock | Less suited | Well suited |
| Loss relief flexibility | More restricted | More flexible |
| View of true performance | Approximate | More accurate |
The cash basis shines when customers pay slowly, because you are not taxed on income you have not yet received. Accruals accounting is stronger when you need a faithful view of profitability, or when you want broader loss relief and interest treatment.
Impact on tax timing
The headline difference is when profit lands in a tax year. Under the cash basis, a December invoice paid the following January falls into the later year, deferring the tax. Under accruals, that income is taxed in the earlier year even though the cash arrives later.
This timing effect feeds directly into your Self Assessment figures and your payments on account. Understanding it helps you plan; read our walk-through of Self Assessment step by step and our guidance on setting aside money for tax so a deferral does not catch you out later.
Interaction with capital allowances
The two methods treat equipment purchases differently.
- Under the cash basis, most equipment you buy for the business is simply deducted as an expense when you pay for it, rather than being claimed through capital allowances. Cars are the main exception and are still handled under the capital allowances rules.
- Under accruals accounting, equipment is capitalised and you claim relief through capital allowances, often using the Annual Investment Allowance to deduct the qualifying cost at the applicable rate.
The practical effect is similar in many cases, but the mechanics and timing differ. Our explainer on capital allowances explained covers this in more depth, and the wider business expenses and deductions hub shows what else you can claim.
Switching between methods
You are not locked in forever, but you cannot switch on a whim every year. You might move from the cash basis to accruals when your business grows, takes on stock, or exceeds the turnover ceiling, or move to the cash basis to simplify.
When you switch, you must make transitional adjustments so that no income or expense is counted twice or missed entirely. For example, money owed to you at the point of changeover needs careful treatment so it is taxed once and only once. Keep clear records through any transition, and consider taking advice if the adjustment is large.
Choosing the right approach
Use this quick checklist to point yourself in the right direction:
- Choose the cash basis if you are a small sole trader, hold little or no stock, get paid in arrears, and value simplicity.
- Choose accruals if you carry stock, invoice on credit, want a true view of performance, or expect to grow or incorporate.
- Think ahead about Making Tax Digital for Income Tax, which will require digital records and regular updates; the method you choose should work cleanly with your software.
Whichever you pick, good record keeping makes either basis painless. The right software records each transaction once and lets you report on the basis that suits you, while keeping you ready for HMRC requirements.