From 6 April 2024 the Government removed the turnover caps that once ring-fenced the cash basis for very small sole traders and partnerships. In other words, cash basis expansion has already happened – 2025/26 is simply the first year in which everyone will feel a full 12-month effect. Instead of juggling year-end debtors, creditors and stock valuations, an unincorporated business now falls into the cash regime by default and is taxed only on the money that actually lands (or leaves) its bank account.
Why talk about limits at all if the law no longer sets one? HMRC’s policy notes and the main GOV.UK guidance suggest that, in practice, once receipts creep much above £1 million, many owners still prefer accruals because lenders, investors and head-office accountants expect GAAP-compliant numbers. That £1 million marker is not a rule, merely a sensible yardstick. Yet it is a generous one: the Office for National Statistics reports that 92% of UK enterprises turned over under £1 million in 2024 (ONS, 2024). Put bluntly, almost every self-employed person now starts life on cash unless they opt out.
This post explains what changed, the timing-of-tax benefit, who gains, who loses and how to migrate records smoothly in cloud software. By the end you should know whether switching from accruals will genuinely lighten your workload or merely swap one set of headaches for another.
What changed for 2024/25 and beyond?
- Default method: Cash basis automatically applies to sole traders and ordinary partnerships. Opt out on the self assessment return if you need accruals.
- Turnover caps scrapped: The old £150,000 entry and £300,000 exit limits disappeared from 6 April 2024 (GOV.UK, 2025).
- Interest deduction: The £500 ceiling on loan interest is abolished, so financing costs follow normal rules.
- Loss relief widened: Trading losses under the cash basis can now be set against general income of the same year, matching accruals treatment.
- MTD-ready: Quarterly digital updates required from April 2026 sit neatly on cash-basis records.
Cash basis expansion and the £1 million “guide-rail”
Because there is no longer a statutory ceiling, you could, in theory, run cash accounting at £2 million receipts. However, practical constraints bite:
- External stakeholders: Banks, private-equity backers and some suppliers insist on GAAP numbers.
- Stock and work-in-progress: Businesses holding large inventories or long-term contracts need accrual adjustments for management purposes anyway.
- VAT cash accounting mismatch: The cash VAT scheme is capped at £1.35 million taxable turnover; if you pass that threshold, running one regime for VAT and another for income can muddle forecasts.
Who is likely to win?
- Consultants, designers and professional practices with intermittent billing cycles.
- Lifestyle businesses where partners draw profits monthly and prize cash-aligned tax bills.
- Micro-retailers taking card payments: POS feeds flow straight into cloud ledgers.
Who should stay on accruals?
- Importers and wholesalers – margins hinge on accurate closing stock figures.
- Engineering or software houses with projects spanning year-end.
- Firms courting external finance or planning a sale: due-diligence packs need GAAP.
Cashflow and tax-timing upside
Under the cash basis, you pay tax only on money received by 5 April. A £120,000 invoice raised on 31 March 2026 but paid on 30 April 2026 falls into 2026/27, delaying the Income Tax and Class 4 NIC for up to 21 months. For sole traders hovering near the additional-rate threshold of £125,140 (2025/26), that deferral can postpone – or even avoid – a 45% slice of earnings.
Digital banking feeds make the benefit visible. In Xero or QuickBooks every cleared transaction instantly updates both your management dashboard and your tax forecast. Cloud accounting automates these feeds and flags slow payers, so you stay on top of real-world cash as well as HMRC’s view of profit.
How to switch cleanly in cloud software
Migrating from accruals need not be painful, but a structured plan helps.
- Export history: Save the last completed accruals trial balance.
- Reverse open items: Post dated 6 April 2025 journals to clear debtors, creditors and prepayments.
- Adjust bank rules: Tell the software to recognise income and expenses only on receipt or payment.
Most platforms provide a one-off conversion wizard, yet we advise a parallel run for one VAT quarter to spot anomalies. Our business advisory team can project-manage the ledger clean-up and reconciliation.
Ongoing controls
- Quarterly reviews: Reconcile bank feeds and contra entries.
- Fixed-asset tagging: Large purchases need Annual Investment Allowance claims.
- Year-end checklist: Exclude customer deposits still held at 5 April from taxable income.
Compliance and forward planning
HMRC expects around 4.2 million taxpayers to enter Making Tax Digital for Income Tax Self Assessment by 2027. Cash-basis records, drawn directly from your bank, are inherently MTD-friendly, but poor bank-feed hygiene can still trigger discovery assessments. Remember: cash deferral is not cash saving – January and July balancing payments will follow.
If your receipts are rising fast, build an exit strategy. To opt back into accruals you must tick the relevant box on the return and restate opening figures, which can be fiddly once you carry sizeable stock or unbilled work-in-progress.
Ready to decide?
Cash basis expansion removes the legislative barriers and puts simplicity within reach of almost every unincorporated business. Whether you embrace it or opt out depends on cashflow timing, stakeholder demands and growth ambitions.
If you would like a frank appraisal of the tax deferral, a worked example for your numbers or hands-on help with the software migration, we can help. Call or email our team and let us show you how the right accounting method can make your money work harder.