Cash Basis vs Accruals Accounting

Cash Basis Explained

Under the cash basis, you record:^[1]

Income when you actually receive the money
Expenses when you actually pay them

If you send an invoice in March but don’t get paid until May, the income counts in the tax year you received the payment, not when you invoiced.

Accruals Explained

Under traditional accruals accounting, you record:^[3]

Income when you earn it (invoice date), regardless of when you’re paid
Expenses when you incur them, regardless of when you pay

This gives a more accurate picture of your business performance in any given period, but requires more bookkeeping.

Side-by-Side Comparison

Feature	Cash Basis	Accruals
Timing	When money moves	When earned/incurred
Simplicity	Simpler — matches bank statements	More complex — debtors and creditors
Who can use	Turnover up to £150,000	Anyone
Default	Default for most small businesses from 2024/25	Must opt in
Loss offset	Carry forward only (same trade)	Sideways relief available
Interest deduction	Capped at £500	No cap

Who Can Use Cash Basis

You can use cash basis if your self-employment turnover is under £150,000. From 2024/25, cash basis is the default for qualifying businesses — you must actively opt out if you prefer accruals.^[1]

Cash Basis Restrictions

The cash basis has some limitations:^[1]

Interest deductions capped at £500 per year
Losses can only be carried forward against future profits from the same trade — no sideways relief against other income
Capital expenditure is limited (you can claim most items directly, but not cars — use capital allowances instead)

When Accruals Is Better

You have significant stock at year-end and need to match costs to sales
You want to claim losses against other income (sideways relief)
You have large interest payments (over £500/year)
Your business is growing rapidly and you need accurate period-by-period reporting

Switching Between Methods

You can switch between cash basis and accruals each tax year. However, when you switch, you may need to make transitional adjustments to avoid income being taxed twice or not at all.^[3]

Cash Basis and MTD

Cash basis works perfectly well with Making Tax Digital. Your quarterly updates simply report the income you’ve actually received and expenses you’ve actually paid during each quarter.^[4] GoFile’s MTD Income Tax software supports both accounting methods.

Frequently Asked Questions

What is the difference between cash basis and accruals?

Cash basis records income when you receive payment and expenses when you pay them. Accruals records income when you earn it (invoice date) and expenses when you incur them, regardless of when money actually changes hands.

Who can use the cash basis in the UK?

You can use cash basis if your self-employment turnover is under £150,000. From 2024/25, cash basis is the default for qualifying businesses — you must actively opt out if you prefer accruals.

Can I claim loss relief on the cash basis?

Cash basis restricts loss relief. Losses can only be carried forward against future profits from the same trade. You cannot use sideways relief against other income or carry losses back. If you expect losses, accruals accounting may be more beneficial.

Can I switch between cash basis and accruals?

Yes, you can switch each tax year. However, when you switch you may need to make transitional adjustments to avoid income being taxed twice or not at all.

Sources

Cash basis — GOV.UK
Cash basis: overview — GOV.UK
How to work out your taxable profits — GOV.UK
Business records if you're self-employed — GOV.UK
Expenses if you're self-employed — GOV.UK

Cash Basis vs Accruals Accounting for Self-Employed