Cash Basis vs Accruals: Which Should You Use?

Cash basis vs accruals is a choice about when income and expenses count for tax. Under the cash basis, you record money when it is actually received or paid; under accruals, you record income when you earn it and costs when you incur them. Since the 2024/25 tax year, the cash basis has been the default for most sole traders.

For many small businesses the difference is invisible, because customers pay straight away. For others — anyone who invoices on credit, holds stock or pays suppliers in advance — the choice can move profit from one tax year to the next. This guide explains both methods, what changed in 2024, and how to decide.

Key takeaways

• The cash basis counts money when it moves; accruals counts it when it is earned or incurred.
• Cash basis is the default for eligible sole traders and partnerships from 2024/25.
• You can opt out and use accruals by electing on your tax return.
• Limited companies and LLPs must use accruals.
• The choice mainly affects timing, not the total profit taxed over time.

The two methods defined

The cash basis works out profit from cash in and cash out during the tax year. If you do a job in March but the customer pays in April, the income falls in the next tax year.

Accruals accounting, sometimes called traditional accounting, records income when the work is done or goods are supplied, and expenses when the cost is incurred, regardless of when money changes hands. Unpaid invoices at the year end count as income, and unpaid bills count as costs. HMRC explains the cash basis on GOV.UK's cash basis page.

What changed from April 2024

Before 2024/25, the cash basis was optional and only available below a turnover limit, with restrictions on claiming losses and interest. From the 2024/25 tax year, it became the default for eligible sole traders and partnerships, the turnover limit was removed, and several of those restrictions were eased. If you have always used accruals and want to keep doing so, you now need to opt out actively on your return. Check the current conditions on GOV.UK, as some specific rules still apply to things like capital purchases.

Cash basis vs accruals compared

When accruals may suit you better

Accruals gives a more accurate picture of how a business performed in a period, which matters if you use your accounts to apply for finance or plan to incorporate later. It can also smooth out distortions: under the cash basis, a large invoice paid a few days after the year end shifts that income into the next year, which may push you into a higher tax band then. Businesses that hold significant stock, or that routinely wait months to be paid, often find accruals easier to reconcile with how they actually run.

Step by step: choosing your method

1. Look at how you are paid. If most customers pay on the spot, the cash basis is usually simplest.
2. Check your year-end position. Large unpaid invoices or bills at 5 April make the choice matter more.
3. Consider stock. If you hold significant stock, accruals may reflect your profit better.
4. Think ahead. If you plan to incorporate or borrow, accruals-based figures may be expected.
5. Tell your software. Set the method so records and MTD updates are prepared correctly.
6. Make the election if needed. To use accruals, opt out on your tax return.
7. Keep it consistent. Switching back and forth needs adjustments, so choose with care.

Worked example (illustrative example)

"Rosa", an invented illustrative example, is a self-employed graphic designer. On 25 March 2026 she invoices a client £3,000 for a finished project, and the client pays on 20 April 2026. On 1 April 2026 she pays £400 for a software subscription covering the next year.

Under the cash basis, the £3,000 falls into 2026/27 because it was received after 5 April, and the £400 is also a 2026/27 expense because that is when it was paid. Under accruals, the £3,000 belongs to 2025/26 because the work was done and invoiced in March, while the £400 subscription relates to 2026/27. Rosa's total profit over the two years is the same either way; only the split between years changes. She stays on the cash basis because it matches her bank feed. The person and figures are invented for illustration.

Common mistakes

• Mixing methods, for example recording income on cash but costs on accruals.
• Assuming a company can use the cash basis. It cannot.
• Forgetting to opt out if you want to continue with accruals.
• Ignoring money owed to you when planning tax under accruals.
• Not telling your software which method you use.

Get the right method set up

Our bookkeeping service starts from £150 per month and sets your records up on the right basis from the start. Our personal tax service, from £180 per year, makes sure your return uses the method that suits you. For tidy records either way, see our month-end checklist and our guide to a separate business bank account.

Not sure which method you are using now? Ask us or see our pricing.