CASH BASIS - SELF EMPLOYED

The 'Cash Basis' is designed to make it easier for small firms to manage their income tax obligations and be more confident "they have got their tax right".  Since the 2024/25 tax year, cash basis is the default way that self-employed businesses (sole traders) and most partnerships calculate their income and expenses for Self Assessment — you no longer need to actively elect to use it. If you'd prefer to use traditional accruals accounting instead, you now need to actively opt out on your tax return each year.

Cash Basis – who qualifies? - The previous turnover thresholds (a £150,000 entry limit and £300,000 exit limit) were abolished from 6 April 2024. Businesses of any size can now use cash basis, regardless of turnover, provided they're otherwise eligible. The scheme remains unavailable to limited companies.

Cash Basis – how does it work? - You can record your income and expenses over the tax year either on a Cash Basis (i.e. when money actually enters and leaves your business, whether cash, card payment or cheque) or by using 'traditional accounting' methods (i.e. accruals basis – recording income and expenses when you invoice your customers or receive a bill). The choice is yours, and you can now move between the two methods from year to year, rather than being locked in once you exceed a turnover threshold.

Cash Basis is likely to better suit the cash flow circumstances of many smaller businesses at the end of the tax year, because you won't have to pay income tax on money that hasn't yet been received.

The Cash Basis probably won't suit you if you run a business that's more complex, e.g. you have high levels of stock or need to get finance for your business – a bank could ask to see accounts drawn up using traditional accounting to see what you owe and are due before agreeing a loan

Two previous restrictions no longer apply from 2024/25 onwards: the cap on claiming interest and bank charges as an expense (previously limited to £500) has been removed, and the restriction on offsetting cash basis losses against other taxable income ('sideways loss relief') has also been removed. This makes cash basis a viable option for a much wider range of businesses than before.

Self-Employed pages ► Self Employed sole traders ■ Registration and National Insurance ■

■ Record keeping ■ Allowable Expenses ■ Home Working Costs ■ Fixed Rate Expenses ■

■ Cash Basis for the Self-Employed ■ Registering for VAT ■ Forming a Limited Company ■

Registered office: 61 Friar Gate, Derby, Derbyshire, DE1 1DJ   T: 01332 202660

Adrian Mooy & Co is the trading name of Adrian Mooy & Co Ltd.  Registered in England No. 05770414