Cash Basis Becomes the Default: What It Means for Your Business from 2024/25 Onwards
From 6 April 2024, the UK tax landscape changed significantly for sole traders and unincorporated businesses. The cash basis accounting method, once limited to smaller businesses, has now become the default approach for calculating taxable profits.
While this change simplifies tax for many, it’s crucial to understand how it works, whether it’s right for your business, and how to handle the transition—particularly if you previously used accrual accounting.
In this guide, we’ll walk you through:
- What the cash basis is
- Who can (and can’t) use it
- How it differs from accruals
- What’s changed from 2024/25
- How to transition without overpaying tax
- When you might prefer to opt-out
- Key action points and how Merranti Accounting can help
🧾 What Is Cash Basis Accounting?
Under the cash basis, you only include income and expenses in your accounts when money physically changes hands.
- Income is counted when received, not when invoiced.
- Expenses are claimed when paid, not when billed.
This is different from the accruals basis (also known as traditional accounting), where income and costs are reported in the period they relate to, regardless of when the money moves.
🔄 What Changed from 6 April 2024?
Before the 2024/25 tax year, businesses could only use the cash basis if:
- Their turnover was under £150,000 to enter, and
- They had to leave the scheme if turnover exceeded £300,000.
From 6 April 2024, this threshold has been abolished. Now:
✅ The cash basis is the default method for eligible unincorporated businesses
❌ The accruals basis must be actively chosen if preferred
✅ Businesses of any size (with exceptions) can use the cash basis
This change is intended to simplify reporting and improve cashflow visibility, especially for smaller operations.
⚠️ Who Cannot Use the Cash Basis?
Not all businesses are eligible. According to ITTOIA 2005, s 25B, the following are excluded:
| Excluded | Explanation |
|---|---|
| Companies | Only applies to unincorporated sole traders and partnerships |
| Limited Liability Partnerships (LLPs) | Treated as companies for accounting and tax purposes |
| Partnerships with corporate partners | The involvement of a company makes it ineligible |
| Herd basis election users | Typically applies to farming and livestock operations |
| Businesses claiming R&D Allowance | Cash basis isn’t compatible with this tax relief |
| Mineral extraction trades | Due to the complexity and long-term nature of such operations |
✅ Most sole traders and traditional partnerships will still qualify.
📊 Key Differences: Cash Basis vs Accruals
| Feature | Cash Basis | Accruals Basis |
|---|---|---|
| Income recognised | When received | When earned/invoiced |
| Expenses recognised | When paid | When incurred |
| Simplicity | ✔ Easier for small businesses | ❌ More complex |
| Bad debt relief | Automatic – if not received, not taxed | Needs to be claimed |
| Capital expenditure | Generally deductible immediately (some exceptions apply) | Depreciated over time |
| Reporting clarity | Matches bank activity | Matches business performance period |
🤔 When Is Cash Basis a Good Fit?
Cash basis works well if:
- You are paid quickly by customers
- You don’t carry stock or work-in-progress
- Your business is service-based
- You want simple tax reporting
- You don’t need to present accrual-based figures to banks/investors
It’s particularly useful for:
- Freelancers
- Contractors
- Sole traders without employees
- Self-employed tradespeople
- Micro-businesses
🔄 How to Transition to Cash Basis (From Accruals)
If you were using the accruals basis up to 2023/24, and now switch to the cash basis, you need to ensure income and expenses are not double-counted or missed.
This is where transitional adjustments come in.
Let’s look at common scenarios:
1️⃣ Trade Debtors
These are invoices issued but not paid by the previous year-end.
Under accruals:
They were included in prior income.
Under cash basis:
They would be included again when paid, unless adjusted.
✅ Transitional Adjustment: Deduct opening trade debtors from 2024/25 income to avoid double taxation.
2️⃣ Trade Creditors
These are bills received but not yet paid at the year-end.
Under accruals:
They were already deducted as expenses.
Under cash basis:
They would be deducted again when paid, unless corrected.
✅ Transitional Adjustment: Add back unpaid creditors at 6 April 2024 to prevent double deduction.
3️⃣ Stock and Work in Progress (WIP)
Under accruals, closing stock and WIP reduce your cost of sales. But under cash basis, stock is ignored unless paid for.
✅ Transitional Adjustment: Deduct opening stock and WIP as a business expense in the first cash basis year.
4️⃣ Prepaid Expenses / Income in Advance
These items may have been deferred under accruals, but should now be recognised when cash actually moves.
Again, adjustments are needed to ensure there’s no overlap or gaps in recognition.
5️⃣ Loans and Interest
Under cash basis, only actual interest paid is deductible—not future charges or capital repayments.
HMRC’s Guidance on “When Is a Payment Made?”
A common grey area is when to count payment: when a cheque is received? Or when it clears?
HMRC’s Business Income Manual (BIM72005) clarifies:
“Businesses may choose the point at which they treat money as received or paid—when it’s received physically, or when it clears the bank—but must apply this consistently year-on-year.”
📝 Example: Transitioning to the Cash Basis
Jane’s Design Studio
- Switched to cash basis from April 2024.
- At 5 April 2024:
- Trade debtors = £8,000
- Trade creditors = £2,500
- Stock = £4,000
Transitional Adjustments:
- Deduct £8,000 from turnover
- Add back £2,500 to expenses
- Deduct £4,000 as opening stock
These adjustments ensure Jane doesn’t pay tax twice or miss deductions already claimed.
🧠 When Should You Opt-Out of Cash Basis?
Even though it’s now the default, some businesses should still use accruals.
You might want to opt-out if:
- You work on long-term projects or have significant WIP
- You hold large stock volumes
- You give customers credit terms
- You need financial statements for loans or grants
- You plan to incorporate soon (to align with company accounting)
- You want more precise profit matching (e.g., high turnover but low receipts)
To opt out, simply elect to use accruals on your tax return.
✅ Benefits of the Cash Basis
- Simplifies accounting for small businesses
- Reflects actual cashflow, not just paper profits
- Easier to manage tax planning
- No need to account for bad debts—if money’s not received, it’s not taxed
- Reduced need for complex accrual adjustments
❗ Common Pitfalls to Watch Out For
- Forgetting to adjust for opening debtors/creditors
- Switching without documenting transitional changes
- Treating cash basis like “money in/money out” without consistency
- Claiming capital items that aren’t allowed (e.g., land, buildings, cars with private use)
- Using it when more complex reporting is needed
🛠️ How Merranti Accounting Can Help
At Merranti, we don’t just handle tax—we help you make the right choices for your business.
When it comes to the cash basis changes, we can:
- Review your 2023/24 accounts
- Prepare transitional adjustments
- Compare cash vs accruals to see what’s best for you
- Help you opt-in or opt-out through your self-assessment
- Manage your bookkeeping, tax returns, and HMRC submissions
Whether you’re a sole trader navigating growth, or a partnership exploring incorporation, we’ll ensure your accounting is structured for clarity, compliance, and cashflow.
📌 Key Takeaways
| Area | Action |
|---|---|
| New Default | Cash basis is now default from 2024/25 for unincorporated businesses |
| Eligibility | Check you’re not excluded (e.g. company, LLP) |
| Transitions | Adjust for debtors, creditors, stock, and WIP from 2023/24 |
| Opting Out | You can still use accruals if better suited—just declare it |
| HMRC Letters | Follow consistent rules on when income/expenses are counted |
| Planning Ahead | Think about upcoming changes, cashflow, and reporting needs |
📞 Ready to Switch to the Cash Basis—The Right Way?
Don’t get caught out by double taxation or missed deductions.
Whether you’re just learning about these changes or already mid-transition, Merranti Accounting is here to help.
We can guide you through:
- Your transition to cash basis
- Calculating and applying transitional adjustments
- Choosing the best accounting method for long-term growth
- Preparing you for 2024/25 tax filing
👉 Contact us today to book a cash basis consultation.
