Who can use cash basis?

Self-employed individuals and partnerships with turnover under £150,000.

What are the disadvantages?

Restricted loss relief, £500 limit on loan interest deductions, may not suit all businesses.

Can I switch between methods?

Yes, but adjustments are needed to avoid double-counting or missing income.

Does cash basis affect VAT?

No, VAT accounting is separate. You can use cash basis for income tax and standard VAT accounting.

When must I leave cash basis?

When turnover exceeds £300,000, you must switch to accruals accounting.

Business2026/27

What is Cash Basis Accounting? UK Definition 2026/27

Written by Waqas Sagar ACA, FCCA, FMAAT

•

Verified by ICAEW, ACCA & AAT

•Updated April 2026

Quick Answer

Recording income when received and expenses when paid - simpler for small businesses.

Definition of Cash Basis Accounting

Cash basis accounting records income when you receive payment and expenses when you pay them. Its simpler than accruals accounting. Self-employed individuals with turnover under £150,000 can use cash basis. It means you only pay tax on money actually received, improving cash flow when customers pay slowly.

Cash Basis Accounting — Key Facts for 2026/27

Turnover limit	£150,000
Interest deduction	£500 limit
Loss relief	Restricted
Exit threshold	£300,000

How Cash Basis Accounting Works — Example

Cash vs Accruals timing

1March: Complete work worth £5,000
2April: Invoice sent
3May: Customer pays £5,000
4Cash basis: Income in May (when paid)
5Accruals: Income in March (when earned)

How Cash Basis Accounting Affects Your Tax

Cash basis simplifies bookkeeping and can defer tax if customers pay slowly. However, it restricts loss relief and some expense claims. Consider which method works best for your business pattern.

Official HMRC Guidance on Cash Basis Accounting

For official guidance, refer to HMRC's documentation. Tax rules can change, so always verify current rates and thresholds on gov.uk.

HMRC: Cash basis accounting

Frequently Asked Questions about Cash Basis Accounting

Related Tax Terms

Accruals Accounting

Recording income and expenses when they occur, not when money changes hands.

Accuracy Note

This information is for guidance only and is based on 2026/27 tax year rates. Tax rules are complex and your circumstances may differ. For personal advice, consult a qualified accountant or tax adviser.