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 the one suitable for 95% of self-employed people, but let’s have a quick look at the differences.
Here you record your income and expenses regardless if you have actually been paid or not. Basically, use your invoices instead of bank statements.
- you invoice a customer on March 25th 2020 (2019/20 tax year)
- customer pays you on April 18th 2020 (2020/21 tax year)
- you must file this in the 2019/20 tax year tax return. Not 2020/21.
The advantages are that you can offset losses and it’s also easier to deal with VAT.
Cash basis accounting
This is much simpler: just record your income or expenses when you actually receive or pay money in your bank.
- You invoice a customer on March 25th 2020 (2019/20 tax year)
- Customer pays you on April 18th 2020 (2020/21 tax year)
- With cash basis, you must file this in the 2020/21.
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.
You can use flat rates for:
- your car (the “mileage allowance“)
- working from home (the “home office allowance”).
For everything else, just work them out as you would normally.
Which one should you choose?
We stand by our recommendation:
- cash basis is super simple
- if your earnings from self-employment are high (you have to use traditional accounting if you make over £150,000 from self-employment), it’s a much better idea to just set up a limited company instead.
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