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Self-employed: cash basis or traditional accounting?

We've updated this guide on 5th March 2021

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.

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 2021 (2020/21 tax year)
  • customer pays you on April 18th 2021 (2021/22 tax year)
  • you must file this in the 2020/21 tax year tax return. Not 2021/22.

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.

Same example:

  • You invoice a customer on March 25th 2021 (2020/21 tax year)
  • Customer pays you on April 18th 2021 (2021/22 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”).

Read more details about these flat rates here.

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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