Total cash actually received during the tax year.
Total value of invoices raised, including unpaid ones.
Total business expenses actually paid during the year.
Business bills incurred but not yet paid.
Reg. 07380272 · England & Wales · Est. 2010
Need professional tax advice?
Gladstone & Co. Accountants offer a free 30-minute consultation to help you with your tax planning and compliance needs.
Cash basis saves you £520.00 in tax this year
Cash Basis
Profit
£37,000.00
Total Tax
£6,531.20
Net Income
£30,468.80
Accruals
Profit
£39,000.00
Total Tax
£7,051.20
Net Income
£31,948.80
Everything you need to know about accounting methods for UK self-employed
What is cash basis accounting?
Cash basis accounting records income when you actually receive payment and expenses when you actually pay them. This is the simpler of the two methods and is the default for most self-employed people in the UK with turnover below the VAT threshold. You only report money that has physically come in or gone out during the tax year.
What is accruals accounting?
Accruals (or traditional) accounting records income when you earn it (i.e. when you invoice) and expenses when you incur them, regardless of when money changes hands. This method gives a more accurate picture of your financial position but requires more bookkeeping. You must include all invoices raised and bills received, even if unpaid at year end.
Which method should I choose?
The best method depends on your circumstances. If you have significant outstanding invoices or unpaid bills at year end, the two methods can produce very different taxable profits. Cash basis is simpler and can defer tax if customers are slow to pay, while accruals may allow you to claim expenses you have not yet paid. Use this calculator to compare the tax impact of each approach.
Who can use cash basis accounting?
Since April 2024, most self-employed sole traders and partnerships can use cash basis regardless of turnover. Previously there was a £150,000 turnover threshold. However, some businesses such as Lloyd's underwriters, those with farming or creative averaging elections, and those with certain loss reliefs cannot use cash basis. Limited companies cannot use cash basis - it is only available to unincorporated businesses.
Can I switch between methods?
Yes, you can switch between methods from one tax year to the next. However, you need to make adjustments when switching to avoid counting income or expenses twice, or missing them entirely. When moving from cash basis to accruals, you will need to include any debtors and creditors in your opening figures. HMRC provides guidance on the transition adjustments required.
What are the limitations of cash basis?
Under cash basis, you cannot claim capital allowances on most assets (except cars) - instead you deduct the purchase price when you pay for them. You also cannot claim loss relief against other income, and losses can only be carried forward. Interest deductions are limited to £500 per year. If you have significant capital expenditure or losses, accruals accounting may be more beneficial.
How does cash basis affect my tax bill timing?
Cash basis can effectively defer your tax liability. If customers are slow to pay, that income is not counted until you actually receive it. Conversely, if you pay expenses in advance, you can claim them immediately. This can be particularly useful for managing cash flow and payments on account. However, the tax is not eliminated - it is simply shifted to a later period when the cash is eventually received.
Do I need to tell HMRC which method I use?
Cash basis is now the default method for eligible self-employed taxpayers. If you want to use accruals accounting instead, you need to opt out by selecting the appropriate box on your Self Assessment tax return. You do not need to apply or get permission from HMRC to use either method, but you must be consistent within a single tax year - you cannot mix and match for different types of transactions.
HMRC-Aligned: This calculator uses official HMRC rates and thresholds for the 2025/26 tax year (6 April 2025 - 5 April 2026). Results are indicative - for complex situations, consult a qualified accountant.
This calculator uses official rates and thresholds from:
Last verified: February 2026 · Tax year 2025/26. Results are indicative — consult a qualified accountant for personalised advice.
Reviewed by M. Samiuddin Quadri, ACCA — Chartered Certified Accountant at Gladstone & Co. · Updated for the 2025/26 tax year.
Disclaimer: This calculator provides estimates based on current HMRC rates and thresholds for the 2025/26 tax year. It does not constitute professional tax, financial, or legal advice. Your actual liability may differ depending on your individual circumstances. Always consult a qualified accountant or tax adviser before making financial decisions. Read our terms