2024/25 tax return
The deadline for submitting the income tax self assessment tax return for 2024/25, and paying any tax due, is 31 January 2026. This article is part of a series designed to help with the completion of 2024/25 tax returns.
What is the cash basis?
Under the cash basis, a person’s profit or loss for tax purposes is found by deducting the total expenses paid from the total income received in that period. This is different from the accruals basis (also referred to as “traditional accounting”) under which profits and losses are calculated by reference to total income receivable and total expenses incurred for the period.
Cash versus accruals
The cash basis is simpler to apply than the accruals basis for many businesses as it does not require adjustments for accruals, prepayments or closing stock. However, the accruals basis may be preferred in some circumstances as it gives a more complete picture of the business’s performance and financial position at a point in time. For a more detailed comparison of the cash basis and accruals basis, see the earlier article Changes to the cash basis for traders | ICAEW.
The focus in this article is on the cash basis for trading income, not on the rules that apply for other sources of income (eg, property income) or for VAT.
Using the cash basis
For 2024/25 onwards, the taxable profit or loss from the trade must be calculated using the cash basis unless:
- the person elects to use the accruals basis; or
- the trade is excluded from the cash basis and so the accruals basis must be used. Trades excluded from the cash basis include:
- trades carried on by all limited liability partnerships (LLPs) or by any general partnerships with a corporate member; and
- trades where an election is in place to use the herd basis or a claim has been made to average fluctuating profits.
This is a significant change from 2023/24 and earlier tax years where the accruals basis was the default basis and the cash basis was optional, subject to the exclusions above and meeting turnover tests to join and stay in the regime. The turnover tests have been removed for 2024/25 onwards.
Where the cash basis was not used for 2023/24, the trader will need to decide between moving to the cash basis or making an election to continue using the accruals basis for 2024/25. Where the cash basis was used for 2023/24, the trader can continue to use the cash basis or elect to use the accruals basis.
Electing to use the accruals basis
Assuming that the trade is not excluded from the cash basis (see above), the business owner can use the accruals basis if they make an election to do so. The election can be made on the individual’s tax return in box 8 on the short self-employment pages or box 10 on the full pages. The deadline for 2024/25 elections is 31 January 2027. The election has effect for the tax year for which it is made and for every subsequent tax year, until either an election is made to move back into the cash basis or the trade becomes an excluded trade.
Moving to the cash basis
On moving to the cash basis from the accruals basis, transitional adjustments may be required to ensure that no amounts are taxed or relieved twice. In the case of an adjustment that increases taxable profits, this could mean that tax is paid earlier than it would have been. It could also increase the total tax paid overall if, for example, it results in the business owner moving from one tax bracket to another for a tax year.
Businesses owners that are new to the cash basis will need to understand how it applies. In addition to differences to when income and expenses are taken into account for tax purposes, there may also be differences in the tax treatment of an item, particularly an item of capital expenditure. Under the cash basis, capital expenditure is deductible in calculating trading profits and losses, subject to exceptions.
Understanding the cash basis
HMRC’s helpsheet HS222 includes guidance on transitional adjustments, lists the main categories of allowable expenditure and explains how the cash basis applies to capital expenditure. There is more detailed guidance in HMRC’s Business Income Manual.
Changes to the cash basis
Businesses that have used the cash basis previously should be aware that changes have been made to the following aspects of the rules for 2024/25:
| 2023/24 and earlier | 2024/25 and later | |
|---|---|---|
| Interest paid | Capped at £500 per year. | No cap. |
| Relief for losses | Relief restricted to carry forward against future profits of same trade and terminal loss relief. | Loss can be offset in the same way as under the accruals basis. |
Partnerships
Although the focus in this article is on sole traders, the cash basis is the default basis for partners where the trade is carried on in general partnership with other individuals only. An election to continue using the accruals basis can be made on the partnership’s tax return.
Further information
How to complete your tax return
Latest on personal tax
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