The cash basis: how most sole traders now work out their profit

How it works

Income counts on the day the customer pays you, not the day you send the invoice. Costs count on the day you pay them. Your profit for the year is simply what came in, less what went out on allowable costs.

What that means in practice

• An invoice still unpaid at 5 April isn't taxed until the year it's paid
• A bill you haven't paid yet isn't claimed until you pay it
• Tools, equipment and vans are claimed in full in the year you buy them
• Cars are the exception: they still go through capital allowances
• If you sell something you claimed for, what you get counts as income

Who uses it

From the 2024/25 tax year it's the default for self-employed people, with no turnover limit. Limited companies can't use it.

Opting out

You can choose traditional (accruals) accounting instead, counting income when you invoice and costs when you're billed. You tick a box on your tax return. It can suit a bigger business with lots of stock or long credit terms, but it means more record keeping.

Losses

The old limits on using losses under the cash basis were removed in 2024, so a loss can now be set against other income or carried back in the same way as under traditional accounting.

Cash basis and VAT

The cash basis for Income Tax is separate from VAT. If you're VAT registered you can choose cash accounting for VAT too, so you pay VAT only when your customer has paid you.