Last updated: 16 October 2026
What are the cash basis changes?
From the 2024/25 tax year, the cash basis became the default way for sole traders and partnerships to work out their taxable profits. You pay tax on money received and paid out in the year, rather than on invoices raised and bills received. The £150,000 turnover entry limit was removed, restrictions on interest and losses were relaxed, and you now have to opt out if you want to use traditional (accruals) accounting. Companies and LLPs can’t use the cash basis.
What changed
| Rule | Before April 2024 | From April 2024 |
| Default method | Accruals | Cash basis |
| Turnover limit to join | £150,000 | None |
| Interest relief | Capped at £500 | No cap |
| Losses | Only carried forward | Can be set against other income |
| Choosing accruals | Default | Election needed |
Who should consider opting out?
- Businesses with large stock or work in progress
- Businesses wanting to claim certain losses sideways under old rules
- Businesses that need accruals accounts for lenders anyway
- Partnerships with corporate partners
How it works
You record money in and money out. Equipment purchases are generally deductible when paid, except cars, land and buildings. You don’t include invoices that haven’t been paid at the year end.
Example
Sam, a decorator, invoices £60,000 in 2026/27 but £5,000 is still unpaid at 5 April 2027. Under the cash basis he’s taxed on £55,000 received. The £5,000 is taxed in 2027/28 when it arrives. Under accruals, he’d be taxed on £60,000.
Landlords
Landlords with property income up to £150,000 already use the cash basis by default. The new rules apply separately to trading income.
Making Tax Digital
From April 2026, sole traders and landlords with qualifying income over £50,000 must use MTD for Income Tax, sending quarterly updates. The cash basis works with MTD software, and the threshold falls to £30,000 in April 2027 and £20,000 in April 2028.
Common mistakes
- Not realising cash basis is now the default
- Leaving unpaid invoices out at cessation
- Deducting car purchases
- Mixing methods between years without adjustment
Records to keep
Keep bank statements, receipts and a record of money received, with dates.
Capital purchases under the cash basis
Most equipment, tools and machinery are deducted when you pay for them, without needing capital allowances. Cars are the exception: claim capital allowances or use simplified mileage rates instead. Land, buildings and shares are also excluded, as are assets bought for a trade that you later sell, where the sale proceeds become taxable income.
Moving from accruals to cash basis
If you switch method, a transitional adjustment stops income being taxed twice or missed. For example, debtors already taxed under accruals at the end of the last year are not taxed again when received. Work out the adjustment carefully, or ask your accountant to, in the year of change.
Frequently asked questions
How do I opt out?
Tick the box on your Self Assessment return.
Can I switch back?
Yes, but adjustments may be needed.
Does it affect VAT?
No, VAT has its own cash accounting scheme.
Can I use simplified expenses?
Yes, alongside cash basis.
Related: the cash basis scheme, death of a sole trader on cash basis and working out taxable profits.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with cash basis accounting advice. See our sole trader accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 16 October 2026. It is not personal advice, so speak to an accountant about your own situation.
