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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!
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:
There are a few advantages to the traditional accounting method:
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:
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.
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:
For everything else, working them out as you would normally should do the trick!
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. 🚨
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