The Quiet Revolution in How Sole Traders Report Profits
From the 2024-25 tax year onwards, the cash basis is the default method for calculating taxable trading profits for all unincorporated businesses. This is one of the most significant simplifications HMRC has made to self-employment taxation - yet many sole traders don't even know it happened.
Here's what changed, who it affects, and what you need to do.
What Is the Cash Basis?
The cash basis is a simplified way of calculating your trading profits:
- Income is recorded when you receive payment
- Expenses are recorded when you pay them
This contrasts with the accruals basis, where income is recorded when you invoice (even if the client hasn't paid yet) and expenses are recorded when you incur them (even if you haven't paid the bill yet).
For most sole traders, the cash basis is simpler because:
- No need to track debtors (money owed to you) at year-end
- No need to track creditors (money you owe) at year-end
- No complex adjustments for prepayments or accruals
- Your profit figure more closely matches the cash actually in your bank account
What Changed for 2024-25?
Three major changes came into effect:
1. Cash Basis Is Now the Default
Previously, you had to opt in to the cash basis on your tax return. From 2024-25, it's the other way around - HMRC assumes you're using the cash basis unless you actively elect to use accruals.
This means if you've been using the cash basis and did nothing differently on your 2024-25 return, everything continues as normal. But if you want to use accruals, you now need to tick a box to elect out.
2. Turnover Limit Removed Entirely
The old rules restricted the cash basis to businesses with turnover under £150,000 (and forced you out at £300,000). These limits have been completely removed.
Any sole trader or partnership (excluding those with corporate partners) can now use the cash basis regardless of turnover. A freelance consultant earning £500,000 can use the cash basis just as easily as a part-time Etsy seller earning £5,000.
3. Interest Deduction Restrictions Removed
Under the old cash basis rules, interest deductions were capped at £500. This cap has been removed. Sole traders using the cash basis can now deduct the full amount of business loan interest, which is particularly relevant given current interest rates.
4. Loss Relief Restrictions Eased
Previously, if you used the cash basis and made a loss, you could only carry it forward against future profits from the same trade. The restriction preventing sideways loss relief (offsetting losses against other income) has been removed.
Who Cannot Use the Cash Basis?
The cash basis is not available to:
- Limited companies - they use Corporation Tax rules (accruals-based)
- LLPs (Limited Liability Partnerships)
- Partnerships with a corporate partner
- Businesses using the herd basis for animals
- Businesses making farming or creative averaging claims
If you operate as a sole trader or a standard partnership, you can use it.
Should You Use the Cash Basis or Accruals?
For most sole traders, the cash basis is the right choice. It's simpler, it matches your bank balance, and with the restrictions removed, there's less downside.
However, you might prefer accruals if:
- You have large outstanding invoices at year-end that you want to recognise as income (to smooth profits across years)
- You have significant stock and need to account for it properly
- You want to claim capital allowances on expensive equipment (the cash basis uses simplified rules)
- You're preparing accounts for a bank or mortgage lender who requires accruals-based figures
- You're planning to incorporate and want consistent accounts for the transition
Important: If you switch from accruals to the cash basis, there are transitional adjustments to calculate. These ensure income and expenses aren't counted twice (or missed entirely) during the switchover. The ICAEW has detailed guidance on these adjustments.
What This Means for Your Tax Return
On the SA103 (self-employment supplementary pages) for 2024-25 onwards:
- Box 8 asks whether you're using the cash basis (tick "Yes" for cash basis, or leave blank and complete additional boxes for accruals)
- Box 10 is for declaring your accounting method
- If you're using the cash basis, several boxes on the SA103 become irrelevant (stock adjustments, debtors, creditors)
TaxMTD automatically configures your Self Assessment return based on your chosen accounting method. If you're using bank feeds and AI categorisation, your transactions are already recorded on a cash basis - the dates they hit your bank account.
The MTD Connection
From April 2026, sole traders with qualifying income over £50,000 must use Making Tax Digital for Income Tax. The quarterly updates submitted under MTD will follow whichever accounting basis you've chosen - cash or accruals.
Since the cash basis aligns naturally with bank transaction data, it's particularly well-suited to MTD's quarterly reporting model. Your bank feed data is already a real-time cash basis record.
How TaxMTD Handles Both Methods
TaxMTD supports both the cash basis and accruals:
- Cash basis (default): transactions are recorded when they appear in your bank feed. Your AI-categorised transactions form the basis of your quarterly MTD updates and annual SA103.
- Accruals basis: use TaxMTD's invoicing to track when income is earned (invoice date) vs when it's received (payment date). The system handles the reconciliation automatically.
You can configure your accounting method in your entity settings. TaxMTD will then generate your tax return with the correct boxes completed.
The Bottom Line
The cash basis becoming the default is genuinely good news for sole traders. It's simpler, the old restrictions are gone, and it aligns perfectly with digital record-keeping. Unless you have a specific reason to use accruals, stick with the default.
If you're filing your 2024-25 return, make sure your software is configured correctly. Get started with TaxMTD and let us handle the complexity.
Further reading: Complete Self Assessment Guide for 2025-26 · MTD for Income Tax: What's Coming · Compare TaxMTD with competitors