--- title: "Cash Basis for Self-Employed Businesses: 2026/27 Guide" description: "**Updated for 2026/27.** Cash basis is the default tax-accounting method for most self-employed sole traders and partnerships unless they opt to use traditional accruals accounting. It normally records income when received and expenses when paid, simplifying tax reporting but changing…" url: "https://www.accountingfirms.co.uk/knowledge-bank/what-is-the-cash-basis-for-self-employed-individuals/" updated: "2026-08-12" category: Self Employed --- # Cash Basis for Self-Employed Businesses: 2026/27 Guide **Updated for 2026/27.** Cash basis is the default tax-accounting method for most self-employed sole traders and partnerships unless they opt to use traditional accruals accounting. It normally records income when received and expenses when paid, simplifying tax reporting but changing the timing and treatment of some items. ## Who uses cash basis? From 2024/25, cash basis became the default for eligible unincorporated businesses and the old general turnover entry restriction was removed. Sole traders and most trading partnerships use it unless they elect accruals. Limited companies and LLPs cannot use the Self Assessment cash-basis regime. Certain businesses remain excluded or have special rules, including some partnerships with corporate members, Lloyd's underwriters, businesses using herd-basis elections and others specified by legislation. ## Income under cash basis Record business receipts when money is received, including cash, bank transfers, card payments and amounts set off against debts. Customer deposits can be income when received depending on the arrangement. Owner capital introduced is not sales income. ## Expenses under cash basis Claim allowable business costs when paid. Examples include stock, rent, software, insurance, professional fees, advertising and the business proportion of mixed-use expenses. Private costs and drawings remain disallowable. ## Bad debts Because unpaid customer invoices have not normally been recognised as income, there is usually no separate bad-debt deduction when they become irrecoverable. Under accruals, the sale may already be included and a bad-debt adjustment can be relevant. ## Equipment and capital expenditure Many business equipment purchases can be deducted as cash-basis expenses, but cars and certain other assets follow capital-allowance rules. Land, buildings, financial assets and other excluded capital items are not ordinary deductions. Private-use adjustments still apply. ## Interest and finance costs The former £500 cash-basis interest restriction was removed from 2024/25. Interest and finance costs are now generally considered under the normal wholly-and-exclusively and other tax rules. Residential property finance costs remain subject to separate landlord restrictions and should not be confused with trading cash basis. ## Losses Cash-basis trading losses can now generally access the same broad relief routes as accruals losses, subject to statutory conditions, caps and anti-avoidance rules. The timing of receipts and payments can still change the amount arising in a year. ## Cash basis versus accruals - **Cash basis:** simpler, follows money movements, fewer debtor/creditor adjustments - **Accruals:** matches income and expenses to when earned or incurred, can give a clearer commercial performance picture Accruals may suit businesses with substantial stock, long contracts, finance applications, investors, complex work in progress or a planned company incorporation. ## Example A consultant invoices £8,000 on 20 March 2027 and is paid on 15 April 2027. Under cash basis, the income normally falls in 2027/28. Under accruals, it is generally recognised in 2026/27 because the work and invoice belong to that period, subject to the precise facts. ## Choosing accruals instead An eligible business can elect out of cash basis through its tax return. Consider unpaid invoices, supplier bills, stock, losses, finance costs, capital assets and expected growth. Apply the chosen method consistently to the business and keep evidence supporting the election. ## Switching methods Transition adjustments prevent income or expenses being taxed twice or omitted. Moving from accruals to cash basis requires treatment of debtors, creditors, stock and capital items; moving back requires opening adjustments. Spread or timing rules can apply to positive adjustments. ## VAT is separate Income Tax cash basis does not automatically mean VAT Cash Accounting. A VAT-registered business can use invoice accounting or an eligible VAT scheme independently. Keep enough invoice information to comply with VAT even if Self Assessment follows cash receipts. ## Making Tax Digital MTD for Income Tax begins from April 2026 above £50,000 qualifying income, April 2027 above £30,000 and April 2028 above £20,000. Digital records must identify income and expense categories. Cash basis can align with bank feeds, but transfers, loans, capital introduced and drawings must still be classified correctly. ## Bank reconciliation Do not treat every bank credit as income or every debit as an expense. Exclude owner transfers, loans, tax payments and private spending. Record cash receipts not banked and payment-processor fees at gross values so turnover is complete. ## Year-end checklist 1. Reconcile all bank, card, cash and platform accounts. 2. Record gross receipts before deducted fees. 3. Identify payments made before 5 April. 4. Review assets and cars for capital-allowance treatment. 5. Exclude private costs, drawings and tax payments. 6. Check losses and transition adjustments. 7. Compare cash basis with an accruals election for the next return. ## Common mistakes - Using invoice dates instead of payment dates - Ignoring cash and platform receipts - Claiming the cost of a car as an ordinary expense - Confusing Income Tax cash basis with VAT Cash Accounting - Failing to record gross sales before merchant fees - Switching methods without transition adjustments - Assuming bank statements alone are complete bookkeeping Use HMRC's official [cash-basis guidance](https://www.gov.uk/simpler-income-tax-cash-basis) and [record-keeping guidance](https://www.gov.uk/self-employed-records). Our [self-employed records checklist](https://www.accountingfirms.co.uk/knowledge-bank/what-records-do-i-need-to-keep-for-my-self-employed-business/) covers the evidence. ## Frequently asked questions ### Is cash basis mandatory? It is the default for most eligible businesses, but they can opt for accruals accounting. ### Can a limited company use it? No. Company accounts and Corporation Tax follow accruals-based rules. ### Does cash basis mean I can ignore invoices? No. Invoices support income, expenses and VAT, and help reconcile receipts and payments. *This guide is general information. Stock, losses and method changes may require professional calculations.*