Cash Basis Accounting for Sole Traders: A Simple UK Guide

What is cash basis accounting?

Cash basis accounting is a simplified way of recording your self-employed income and expenses for HMRC. The rule is straightforward: you record income when you actually receive the money, and you record expenses when you actually pay them. You do not record unpaid invoices or bills you haven't yet settled.

This differs from traditional accounting, which uses the "accruals" or "earnings" basis. Under accruals accounting, you record income when you invoice a customer (even if they haven't paid yet), and expenses when you incur them (even if the bill hasn't been paid). The accruals method is more accurate in the long run, but it is also more complicated — especially for sole traders who just want to know where they stand financially.

For most small self-employed tradespeople, cash basis is simpler and closer to how you actually experience your money day-to-day.

Who can use cash basis?

You can use cash basis if you are:

• A sole trader (self-employed individual)
• A partner in a trading partnership

There is also a turnover limit. For cash basis to apply, your annual trading income must be below £150,000. If your turnover goes above £300,000, you must leave cash basis and switch to accruals. Between £150,000 and £300,000, you can continue using cash basis if you were already using it, but you cannot start using it for the first time.

Limited companies cannot use cash basis — they must use the accruals method.

Cash basis vs accruals: a side-by-side example

Suppose you are a self-employed electrician. In March 2025, you complete a rewiring job worth £3,000 and invoice the customer. They pay you in April 2025. You also buy £500 of materials on credit in March and pay the supplier in April.

Under accruals accounting:

• March 2025 income: £3,000 (invoiced)
• March 2025 expenses: £500 (materials incurred)
• March profit: £2,500

Under cash basis accounting:

• March 2025 income: £0 (nothing received yet)
• March 2025 expenses: £0 (nothing paid yet)
• April 2025 income: £3,000 (received)
• April 2025 expenses: £500 (paid)
• April profit: £2,500

The annual profit is the same either way, but the timing of when it appears in your accounts differs. For a tradesperson paid promptly, the difference is small. For someone with a large number of outstanding invoices at the tax year end, cash basis can make a real difference to the tax bill timing.

How to choose cash basis for your self-assessment

You choose whether to use cash basis on your annual Self Assessment tax return. When you complete the self-employment pages (SA103), there is a box asking whether you are using cash basis. Tick it, and that is it.

You are not locked in forever. You can switch between cash basis and accruals from one tax year to the next, though HMRC does have specific rules about how to handle the transition to avoid double-counting income or expenses. The practical position for most sole traders is to pick one method and stick with it.

If you are unsure which to choose, the HMRC cash basis guidance explains the rules in detail.

Advantages of cash basis for tradespeople

Cash basis suits most small trade businesses well. Here is why:

• Simpler record-keeping: You only need to track money in and money out. No need to keep a debtors ledger or creditors schedule. Your bank statement becomes essentially your accounts.
• Easier to understand: You record what you received and what you paid, which matches how most people think about their finances.
• No tax on unpaid invoices: Under accruals, you could theoretically owe tax on an invoice that the customer never actually pays. Under cash basis, if you never receive the money, it never appears as income.
• Better alignment with cash flow: Your taxable income is closer to the money actually available in your bank account.

Disadvantages and watch points

Cash basis is not perfect for every situation. A few areas to be aware of:

• Loss relief is more restricted: Under cash basis, trading losses can only be carried forward against future profits from the same trade. You cannot set them against other income (for example, if you also have employment income). Under accruals, you have more flexibility. If you have a loss in year one and other income sources, accruals might be more beneficial.
• Capital expenditure rules differ: Under cash basis, you can deduct the cost of most capital items (tools, vehicles, equipment) in the year you buy them, rather than claiming capital allowances over time. For most tradespeople this is actually an advantage, but it is worth understanding the difference.
• The £500 capital limit for certain assets: Under cash basis, the cost of assets that are not "wholly and exclusively" for business use is treated differently. For assets used partly for personal purposes, there is a £500 annual limit on how much you can deduct. This mainly affects vehicles used for personal as well as business journeys.
• Loans and finance: Interest on loans taken out under cash basis is only deductible up to £500 per year. If you have a significant business loan, this could be a disadvantage versus accruals accounting.

Capital allowances and cash basis

One area where cash basis differs most from traditional accounting is how it treats capital expenditure, meaning money spent on tools, vehicles, and equipment.

Under accruals accounting, you would normally claim capital allowances — either the Annual Investment Allowance (AIA) or Writing Down Allowance — to deduct the cost of plant and machinery over time.

Under cash basis, you can simply deduct the purchase cost of most tools and equipment in the year you buy them as a revenue expense, without using the capital allowances system. For most small trade businesses buying tools and equipment, this is simpler and often gives the same result.

The exception is cars, which must still go through the capital allowances system even when you use cash basis. Van purchases, however, can be deducted in full in the year of purchase under cash basis, which is a useful simplification.

Use our self-assessment calculator to get a rough idea of your tax position and see how timing affects what you owe.

Keeping records under cash basis

Even on cash basis, HMRC requires you to keep adequate records. You need to retain:

• Records of all business income received (invoices, bank statements)
• Records of all business expenses paid (receipts, bank statements)
• Records of any capital items bought (tools, vehicles) and their cost

You need to keep these records for at least five years after the relevant tax year's Self Assessment deadline. From April 2026, Making Tax Digital for Income Tax Self Assessment (MTD ITSA) will require sole traders with income above £50,000 to keep digital records and submit quarterly updates to HMRC. Read our guide on MTD for sole traders in 2026 to prepare.

When to consider switching to accruals

Cash basis works well for most sole traders. However, there are situations where switching to accruals accounting may be worth the added complexity:

• You have significant long-running debts to customers and want to offset bad debts as expenses.
• You have a large business loan and want to deduct more than £500 in interest per year.
• You make a trading loss and want to offset it against other income sources.
• Your accountant recommends it for your specific situation.

If you are unsure, speak to an accountant who works with tradespeople. The cost of an hour's advice is usually worth it.

Summary

Cash basis accounting is the sensible default for most UK sole trader tradespeople. It is simpler than accruals, aligns well with how money actually flows through a trade business, and keeps HMRC record-keeping manageable without specialist knowledge. Check the eligibility rules (sub-£150,000 turnover), be aware of the restrictions on loss relief and loan interest, and keep your records organised. Done right, it makes your annual Self Assessment far less painful.