Cash Basis vs Accruals Accounting: Which Should UK Sole Traders Use?

If you are a sole trader getting to grips with Making Tax Digital, you will encounter a choice — or at minimum a default assumption — about your accounting method. Cash basis or accruals? Most sole traders have never had to think about this, but MTD makes it relevant. This guide explains what both methods are, how they affect your quarterly submissions, and which one is right for you.

What is the cash basis?

The cash basis records transactions based on when money actually moves.

• Income: you record it when a client pays you — not when you raise the invoice
• Expenses: you record them when you make the payment — not when you receive the bill

Example: you complete a project and send an invoice for £2,000 on 28 March 2026. The client pays on 12 April 2026. Under cash basis, that £2,000 falls into the 2026–27 tax year, not 2025–26.

The cash basis was introduced by HMRC specifically for smaller businesses because it matches what actually appears in your bank account — making bookkeeping more intuitive and reducing the risk of paying tax on money you have not yet received.

From April 2024, cash basis became the default for most sole traders. If you do nothing, HMRC assumes you are using cash basis. You only need to actively opt out if you want to use accruals instead.

What is accruals (traditional) accounting?

Accruals accounting records transactions based on when they are earned or incurred — regardless of when cash moves.

• Income: recorded when you raise the invoice, even if the client has not yet paid
• Expenses: recorded when the cost is incurred, even if you have not yet paid the bill

Using the same example: the £2,000 invoice raised on 28 March 2026 is income in 2025–26, even though the payment arrives in April 2026.

Accruals accounting gives a more accurate picture of your business's financial position at any point in time. If you have significant outstanding invoices at year-end, accruals better represents your true financial health. Limited companies are required to use accruals — it is the accounting standard used in formal accounts.

The downside: it requires tracking debtors (money owed to you), creditors (money you owe), and making period-end adjustments. This is more complex and more error-prone without good software.

How the choice affects MTD quarterly submissions

Under Making Tax Digital for Income Tax, you submit quarterly digital updates to HMRC covering income and expenses for each three-month period.

If you use cash basis: your quarterly figures simply reflect what actually moved through your business during the quarter. Income in = invoices paid. Expenses out = payments made. For most sole traders, this is straightforward and matches their bank reconciliation directly.

If you use accruals: your quarterly figures reflect what was invoiced and incurred during the quarter, not what was paid. This means your software needs to track invoices raised but unpaid, and bills received but not yet paid. At the End of Period Statement, you may also need to make adjustments for accrued income and prepayments.

Most sole traders find cash basis considerably simpler to manage under MTD. It reduces the risk of error and means your quarterly submissions are directly verifiable against your bank statements.

Not sure which MTD software handles your accounting method best? Compare options →

Who should use cash basis?

Cash basis suits you if:

• Your turnover is under £300,000 per year
• You are a straightforward service business — you invoice clients and they pay within a short period
• You want the simplest possible bookkeeping under MTD
• You prefer your tax figures to reflect actual cash received

This covers the majority of UK freelancers, contractors, tradespeople, and service-based sole traders. If you bank regularly and keep decent records, cash basis is the natural choice.

Who should use accruals?

Accruals may suit you if:

• You carry significant stock or work in progress at year-end
• You regularly have large outstanding invoices that straddle tax years
• Your business is growing toward limited company status (getting used to accruals now avoids a painful transition)
• You work with an accountant who prepares formal accounts — accruals is their default framework
• You have property income alongside self-employment income and need consistent treatment across both

If you use accruals, make sure your MTD software can handle invoice-level tracking and period-end adjustments. Xero and QuickBooks both handle accruals well. FreeAgent is primarily designed around cash-based workflows, though it can accommodate accruals with some care.

Try Xero free for 30 days if you use accruals accounting →

Comparing the two methods: a practical example

Suppose your sole trader business has the following activity in March and April 2026:

Event	Date	Cash basis	Accruals
Invoice £3,000 raised	25 March 2026	Not yet income	Q4 2025–26 income
Client pays £3,000	10 April 2026	Q1 2026–27 income	Already recorded
Office supplies £200 paid	2 March 2026	Q4 2025–26 expense	Q4 2025–26 expense
Software bill received, paid April	28 March 2026	Q1 2026–27 expense	Q4 2025–26 expense

As you can see, cash basis ties your quarterly MTD submissions directly to actual bank movements. Accruals requires you to track the timing of invoicing and billing regardless of payment.

Over a full year, total taxable profit will typically be similar under both methods. The main practical difference is which quarter or tax year the figures fall into.

What happens if you do not choose?

From April 2024, HMRC changed the default: unless you opt out, sole traders are assumed to be using cash basis. If you have historically used accruals and switched to MTD software without explicitly configuring it, double-check which method your software is applying to your records.

If your previous software or spreadsheets used accruals, the transition to cash basis in your MTD software requires a one-off adjustment to avoid double-counting income that was invoiced in the old system and paid after the switch. An accountant can help you get this right cleanly.

Which MTD software handles both methods?

Software	Cash basis	Accruals	Best for
FreeAgent	Primary design	Possible with care	Cash basis sole traders and freelancers
Xero	Supported	Full support	Accruals users, accountant-led businesses
QuickBooks	Supported	Supported	Either method, invoice-heavy businesses
Sage	Supported	Full support	Accruals users, growing businesses

For most sole traders choosing cash basis — the simple majority — FreeAgent is the most intuitive option and is free with NatWest, RBS, Ulster Bank, or Mettle business accounts.

Summary: which method for most sole traders?

For the vast majority of UK sole traders, cash basis is the right choice. It is simpler, directly tied to your bank account, and is now the HMRC default. It makes your MTD quarterly submissions straightforward and reduces the scope for error.

Use accruals if you have a genuine reason — significant stock, complex revenue recognition, growing toward limited company status, or an accountant who specifically advises it. In most other cases, cash basis does the job more cleanly.

The most important thing is consistency: pick a method, configure your software correctly, and stick with it.

Last updated April 2026. HMRC guidance on cash basis: gov.uk/simpler-income-tax-cash-basis.