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. Let's look at the differences and see which one is best for you.

Traditional accounting

Here you record your income and expenses regardless if you have actually been paid or not. Basically, use your invoices instead of bank statements.

For example:

  • You invoice a customer on March 25th 2018 (2017/18 tax year).
  • Customer pays you on April 18th 2018 (2018/19 tax year).
  • You must file this in the 2017-2018 tax year tax return. Not 2018-2019.

Cash basis accounting

This is much simpler: just record your income or expenses when you actually receive or pay money in your bank.

Same example:

  • You invoice a customer on March 25th 2018 (2017/18 tax year).
  • Customer pays you on April 18th 2018 (2018/19 tax year).
  • With cash basis, you must file this in the 2018-2019.

The Simplified Expenses Scheme

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

You can use flat rates for:

  • business costs for cars
  • working from home

For all the other expenses it’s simple: just work them out as you would for cash basis.

Which one should you choose?

HMRC suggests that cash basis accounting is most useful for sole traders offering services: interior decorators, painters, hairdressers, plumbers, Uber drivers, etc.


  • Are you making more than £83,000 per year? You cannot choose cash basis.
  • Are you using cash basis and have income bigger than £162,000? You must switch to traditional accounting.

Second, you might prefer traditional even if you qualify for cash basis:

  • Are you making a loss and have other income as well? Only traditional accounting lets you offset those losses - and pay less tax.
  • Do you need to register for VAT? Traditional accounting makes claiming VAT much easier.

Main differences at a glance

Question Cash basis Traditional accounting
How do I claim equipment, like software or a computer? Claim them as allowable expenses Deduct them as claimable allowances
Are my loans deductible? Only up to £500 - and only for the interest part, not the actual repayments You can claim them in full
Can I claim my car? Claim it as a capital allowance (and the fuel, etc. as expenses) or use simplified rates for mileage. You can deduct it as capital allowance
What if I have customers who don’t pay? You cannot write them off as “bad debts” You can write them off against your revenue
What happens if I make losses from self-employment? You cannot offset these losses against income from other sources (like employment) You can offset these losses in full

For more information, you can check here what else counts as an allowable expense.

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