From the 2024/25 tax year, cash basis accounting is the default for unincorporated businesses — sole traders and partnerships. Previously, businesses had to elect into the cash basis, and there were turnover restrictions and a low cap on interest deductions. The new rules remove those restrictions and flip the default. For many small businesses this is a positive simplification; for others, it requires careful thought about whether to elect out.
What is cash basis?
Under cash basis, you account for income when received and expenses when paid, rather than when invoiced or accrued. So:
- A £10,000 invoice raised in March 2026 but paid in May 2026 is taxed in 2026/27, not 2025/26.
- A £2,000 supplier bill received in February 2026 but paid in April 2026 is deductible in 2026/27.
- Year-end accruals, prepayments and bad debt provisions disappear from the calculation.
For most small service-based businesses, cash basis closely matches their economic position and avoids the cost of full accruals accounting.
What changed in 2024/25
- Cash basis is now the default. You must explicitly elect to use accruals (the "GAAP basis") if you want to.
- The previous £150,000 entry threshold and £300,000 exit threshold are abolished. Any size of unincorporated business can use cash basis.
- The £500 cap on interest deductions under cash basis is removed. Interest is now deductible on the same basis as under GAAP.
- Loss relief restrictions under cash basis are relaxed — losses can be carried back or used sideways much as under accruals, subject to general loss rules.
Who benefits from cash basis?
- Service businesses with no inventory and short payment cycles.
- Landlords using cash basis for property income (separate but parallel regime).
- Freelancers and consultants where invoicing aligns broadly with cash receipts.
- Sole traders with simple bookkeeping who want to minimise compliance cost.
Who should opt out and use accruals?
- Businesses with significant work-in-progress at year-end (e.g. construction).
- Businesses with material stock. Stock is not recognised under cash basis until purchased, which can distort profits.
- Businesses with bad debt risk. Cash basis gives no relief for receivables you never collect (because you never recognised the income to start with).
- Businesses seeking to raise external finance. Lenders and investors prefer accruals accounts for comparability.
- Businesses planning to incorporate. The transition is simpler from accruals.
- Businesses with profits close to bands where timing of income matters strategically.
How the election works
To use accruals accounting instead of cash basis, you tick the appropriate box on your Self Assessment return. The election applies for that tax year. You can switch back to cash basis in a later year, subject to transition adjustments (which prevent income or expenses from being double-counted or omitted at the switch).
Interaction with MTD ITSA
This is where it gets interesting. Quarterly updates under MTD ITSA (from April 2026) need a basis of accounting. Cash basis is materially simpler to operate within software, because you do not have to estimate accruals quarterly. If you have been using accruals and are now contemplating MTD ITSA, this is the right moment to look at whether cash basis is a better fit.
Sectors where the choice is finely balanced
- Contractors: typically cash basis is fine, unless retentions are large and irregular.
- Property landlords: cash basis is the default and rarely worth opting out.
- Trades with stock (cafes, retailers): accruals usually gives a more accurate picture and avoids "front-loading" tax on stock purchases.
- Professional services: cash basis usually wins.
- E-commerce: cash basis can defer tax on revenue that has been received but not yet "earned" through fulfilment — beneficial in growth phases.
Practical action items
- Check your current basis. If you have been on accruals since incorporation but assumed the default change applied automatically, you may still be on accruals because no election was made the other way.
- Model the impact of switching. Run a side-by-side calculation on at least two years of historic figures.
- Consider MTD ITSA implications if you are in scope from April 2026 or 2027.
- Get the transition adjustments right. Errors in the year of switch are common and lead to enquiries.
Our team handles cash basis vs accruals modelling as part of Self Assessment preparation and broader tax planning. To run the numbers on your business, book a 30-minute call, or get in touch via the contact page. The modelling itself is usually a one-off exercise that pays for itself within the first tax year of the chosen basis.