Cash Basis vs Accruals: When Does a Late Invoice Count as Income?

Why the Timing of Income Recognition Matters

Imagine you invoice a client for £5,000 in March 2026 but they do not pay until June 2026. That single late payment could fall into two different tax years depending on how you account for your income. For sole traders completing a Self Assessment return, the accounting method you use — cash basis or accruals basis — determines which year that income belongs to, and therefore when you pay tax on it.

The Cash Basis: Tax Follows the Money

Under the cash basis, you record income when you actually receive payment, not when you raise the invoice. So if your client pays that £5,000 invoice in June 2026, it falls into the 2026/27 tax year (ending 5 April 2027), even though you did the work and issued the invoice in March 2026.

From April 2024, HMRC made the cash basis the default method for sole traders and most partnerships. Unless you actively opt out, you are almost certainly using cash basis already. Key features to remember:

• Income is recognised on the date funds clear into your account.
• Expenses are recognised when you actually pay them.
• There is no need to account for debtors or creditors on your tax return.
• The cash basis has no upper turnover limit for sole traders since April 2024.

The Accruals Basis: Tax Follows the Invoice

Under the accruals basis (also called traditional accounting), income is recognised in the tax year the work was completed or the invoice was raised — regardless of when you are paid. That same £5,000 invoice raised in March 2026 would count as 2025/26 income, meaning you could owe tax on money you have not yet received.

You must opt in to use accruals basis, and sole traders typically choose it when:

• They have significant stock or work in progress to account for.
• Their accountant or lender requires more detailed accounts.
• They want to match income and costs to specific accounting periods precisely.

The Practical Risk: Paying Tax on Unpaid Invoices

The biggest danger of the accruals basis is a cash flow mismatch. If a client is slow to pay — or defaults entirely — you may have already included that income in your Self Assessment return and paid tax on it. You can claim bad debt relief if the debt becomes genuinely irrecoverable, but this requires you to have exhausted reasonable steps to collect and formally written off the debt in your records. You cannot simply claim relief because payment is overdue.

Under the cash basis, this problem largely disappears: if you have not been paid, you have not recognised the income, and you have no tax liability on it yet.

Switching Between Methods

If you want to switch from accruals to cash basis (or vice versa), you must make adjustments in the year of change to avoid double-counting income or missing it altogether. HMRC provides specific transitional rules for this. It is strongly advisable to speak to an accountant before switching, particularly if you have significant outstanding invoices or prepaid expenses at the point of change.

Actionable Steps for Freelancers

• Check your current method: If you have never actively chosen accruals, you are almost certainly on cash basis since April 2024.
• Review your records: Make sure you are recording the date payment is received, not just the invoice date.
• Chase late invoices before 5 April: Under cash basis, collecting payment before the tax year ends brings the income into that year — useful if your income will be lower next year.
• Document bad debts carefully: If using accruals and a debt is unrecoverable, keep written evidence of your collection attempts before claiming relief.

The Bottom Line

For most freelancers and sole traders, the cash basis keeps things simpler and avoids the stress of paying tax on money that has not arrived. But whichever method you use, understanding exactly when income is recognised means no nasty surprises when your Self Assessment deadline comes around.