Self-employed: cash basis or traditional accounting?

When you register as self-employed with HMRC you’ll have to choose which type of accounting you prefer: cash basis or traditional.

Cash basis is suitable for 95% of self-employed people and can make life much easier (especially when it’s time to pay tax) but of course, the choice is yours. 

Nonetheless, let’s have a quick look at the differences!

Traditional accounting

This is when you record your income and expenditure regardless of if you have been paid or not. 

Basically, you use your invoices instead of bank statements – this is accrual-based accounting.

Confused? Luckily we’ve got an example:

• You invoice a customer on March 25th 2024 (2023/24 tax year)
• The customer pays you on April 18th 2024 (2024/25 tax year)
• You must file this in the 2023/24 tax year tax return (not 2024/25)

There are a few advantages to the traditional accounting method:

• You can offset losses 
• It’s easier to deal with VAT

Cash basis accounting

This method is actually much more simple and particularly ideal for those who run a small business. Sole traders will also benefit from cash basis accounting. 

All you have to do is record your income or expenses when you actually receive or pay money into your bank. Now come the end of the tax year, you will only pay income tax on money received in your accounting period.

Let’s look at the same scenario now, but using the cash basis accounting method:

• You invoice a customer on March 25th 2024 (2023/24 tax year)
• The customer pays you on April 18th 2024 (2024/25 tax year)
• With cash basis, you must file this in the 2024/25

FYI: You can still claim capital allowances and allowable business expenses when using cash basis accounting. Find out more about what is generally accepted here.

The Simplified Expenses Scheme

This is a way of calculating some of your business expenses using flat rates. You can choose this only if you also use cash basis accounting.

You can use flat rates for:

• Your car (the mileage allowance) 🚗
• Working from home (the home office allowance) 🏠

Read more details about these flat rates here.

For everything else, working them out as you would normally should do the trick!

Which one should you choose?

Of course, different methods work differently for everyone but we think this time cash basis accounting takes the winning spot. It’s just so much more simple and who doesn’t love simplicity?

🚨 Bear in mind though, if your earnings from self-employment are over £150,00 – you can use traditional accounting only. In this case, we’d recommend setting up a limited company instead. 🚨