Cash Basis Accounting: Save Tax and Switch on Self Assessment

What Is Cash Basis Accounting?

Cash basis accounting means you record income when you actually receive it and expenses when you actually pay them. This is the default method for most sole traders and freelancers in the UK since HMRC made it the standard starting point from the 2024/25 tax year onwards.

The alternative is traditional (accruals) accounting, where you record income when an invoice is raised and expenses when they're incurred, regardless of when money changes hands. For many freelancers, this can mean paying tax on invoices that haven't been paid yet — a real cash flow headache.

Who Can Use Cash Basis?

Cash basis is available to sole traders and partnerships (not limited companies). As of 2024/25, it applies automatically unless you actively opt out. You can use it if your annual turnover does not exceed £500,000. If your turnover is higher, you must use accruals accounting instead.

When Cash Basis Can Save You Tax

Cash basis doesn't automatically lower your tax rate, but it can delay when tax becomes due — which has real financial value. Here are the main scenarios where it works in your favour:

• Late-paying clients: If a client owes you £5,000 at 5 April 2026 but pays in May 2026, under cash basis that income falls into the 2026/27 tax year, not 2025/26. You won't owe tax on it until January 2028.
• Upfront expenses: If you pay for software, equipment, or subscriptions before you receive related income, you can deduct those costs immediately under cash basis rather than spreading them.
• Simplified interest rules: Under cash basis, you can deduct loan interest up to £500 per year directly, without complex calculations.
• No work in progress valuations: You don't need to value partially completed projects at year-end, saving time and avoiding inflated profit figures.

When Accruals Accounting Might Be Better

Cash basis isn't always the right choice. Consider sticking with accruals if:

• You have significant stock or work in progress at year-end
• You want to claim losses against other income sources (cash basis restricts how losses can be used)
• You're planning to grow quickly and want your accounts to reflect a more accurate financial picture for lenders or investors
• You have large capital allowance claims that are more beneficial under the accruals rules

How to Switch on Your Self Assessment Return

Because cash basis is now the default for sole traders, most people are already using it without realising. However, if you previously opted out or are unsure, here's what to do:

• Check your current method: Look at last year's Self Assessment return (SA103, the self-employment pages). Box 8 confirms whether you used cash basis.
• Switching to cash basis: Simply tick the cash basis box on your SA103 when filing your 2025/26 return. No formal application is needed.
• Switching to accruals: Leave the cash basis box unticked and ensure your records follow accruals principles throughout the year.
• Transitional adjustments: When switching between methods, HMRC requires you to make transitional adjustments to avoid counting income or expenses twice. If you're switching from accruals to cash basis, any invoices already taxed under accruals should not be counted again when received. It's worth getting an accountant to check these figures.

Practical Tips to Get It Right

• Keep clear records of payment dates, not just invoice dates
• Use accounting software that supports cash basis reporting — many platforms including EasyTax handle this automatically
• Review your method each year, especially if your turnover is growing towards the £500,000 limit
• If you're in your first year of trading, cash basis almost always makes sense — it's simpler and your income is likely unpredictable

Cash basis accounting is one of those quiet wins that many freelancers overlook. With a small adjustment to how you record your finances, you can protect your cash flow and keep your tax bill firmly under control.