Cash basis becomes the default for self-employed

From 6 April 2024, the cash basis is the default method for self-employed individuals and partnerships to calculate their taxable profits. This replaces the traditional accruals basis for most small businesses.

While simpler for many—as it records income and expenses when money actually changes hands—businesses can still opt-out and use the accruals basis if it provides a more accurate reflection of their financial position.

What is the cash basis?

Under the cash basis, you only record income when the money is actually received in your bank account, and you only record expenses when you actually pay them. This contrasts with the accruals basis, where income is recorded when an invoice is issued (even if unpaid) and expenses are recorded when a bill is received.

Removal of restrictions

To encourage wider adoption, the government has removed several previous restrictions. The turnover thresholds that previously forced growing businesses out of the cash basis have been scrapped. Additionally, the restriction on deducting more than £500 in interest expenses has been removed, allowing businesses to claim full tax relief on their borrowing costs.

Should you opt out?

While the cash basis is simpler, it isn't right for everyone. If your business has significant levels of stock, complex financing arrangements, or if you need to produce traditional accounts to secure a bank loan, the accruals basis may still be necessary. You must actively opt-out on your tax return if you wish to continue using the accruals method.