Key takeaways

  • Cash basis is the default accounting method for self-employment and property income under Making Tax Digital for Income Tax.
  • Since 6 April 2024 sole traders have no turnover limit for cash basis; the old £150,000 entry and £300,000 exit limits were removed.
  • For property businesses, cash basis is the default where cash receipts are £150,000 or less for the tax year.
  • Under cash basis you record income when you are paid and expenses when you pay, so no accounting adjustments are needed at year end.
  • If you choose traditional (accruals) accounting, you make adjustments for prepayments and accruals after the fourth quarterly update, before the tax return.
  • MTD software asks whether you use cash basis or traditional accounting when you prepare your accounts.
  • Limited companies, LLPs and partnerships with corporate partners cannot use cash basis.

Most sole traders and landlords joining Making Tax Digital for Income Tax in April 2027 should stay on the cash basis. HMRC’s guidance says cash basis is the default for self-employment and property income, and you need no year-end accounting adjustments if you use it. Traditional (accruals) accounting is still allowed, but it adds a step after your fourth quarterly update.

What is the default accounting method under MTD?

Cash basis is the default method for MTD for Income Tax. HMRC’s page on adjusting your business income, updated 16 October 2026, says so directly.

Your MTD software will ask which basis you use when you set it up. Pick cash basis unless you have a reason not to.

How the two methods differ

The two methods differ in when income and costs are recorded. The cash basis follows money in and out of the bank; accruals follows invoices and bills.

PointCash basisTraditional (accruals)
Income recordedWhen you are paidWhen you invoice
Expenses recordedWhen you payWhen the bill relates to the period
Year-end adjustmentsNonePrepayments, accruals, stock

Under cash basis you do not pay Income Tax on money a customer still owes you. Under accruals, an invoice raised on 30 March counts in that tax year even if it is paid in May.

Who can use cash basis?

Sole traders and partnerships without corporate partners can use cash basis. GOV.UK’s who can use cash basis page lists the exclusions.

  • Cannot use it: limited companies, LLPs, and partnerships with a corporate partner.
  • Also excluded: Lloyd’s underwriters, some farmers and creatives who have made profit-averaging or herd basis elections, and businesses that have claimed research and development allowance.
  • Landlords: HMRC’s PIM1101 says cash basis is the default for property businesses with cash receipts of £150,000 or less in the tax year.

What changed in April 2024

From 6 April 2024 the cash basis became the default for trading income, with accruals as an opt-out. HMRC’s policy paper on expanding the cash basis set out three changes:

  1. The £150,000 entry and £300,000 exit turnover limits were removed.
  2. The £500 cap on deductible interest was removed.
  3. Cash basis losses can be set against general income or carried back, like accruals losses.

These changes removed most of the reasons larger traders used to avoid cash basis. They did not change the £150,000 limit for property businesses.

How the choice affects your quarterly updates

Your quarterly updates use whichever basis you keep your records on. Each update is a cumulative summary from 6 April, with totals by category rather than individual receipts, according to HMRC’s quarterly updates guidance.

Update periodDeadline
6 April to 5 July7 August
6 April to 5 October7 November
6 April to 5 January7 February
6 April to 5 April7 May

If you use traditional accounting, HMRC says your software lets you adjust the annual totals for prepayments and accruals once you have sent the fourth update. You then submit your tax return. On cash basis this adjustment step is not needed. See our guide to MTD quarterly deadlines.

Which applies to you?

Use this list to decide.

  • If you are a sole trader paid soon after you invoice, stay on cash basis.
  • If you are a landlord with rent of £150,000 or less, cash basis applies by default.
  • If you hold large stock, have long credit terms, or need accounts for a lender, accruals may give a truer picture.
  • If you run more than one business, you can choose the basis for each one separately.
  • If you trade through a limited company, MTD for Income Tax does not apply to the company and cash basis is not available.

How to choose accruals

You choose traditional accounting by electing out of cash basis on your tax return. GOV.UK says you must state on your Self Assessment return that you used traditional accounting. In MTD software you also select the traditional basis when asked.

Keep in mind that accruals means more records: debtors, creditors and stock at the year end. Plan who will do the adjustments before the 31 January filing deadline.

What to do now

If you join MTD on 6 April 2027 because your 2025/26 qualifying income is over £30,000, take these steps.

  1. Check which basis you used on your 2025/26 return.
  2. Decide whether to keep it for 2027/28, using the list above.
  3. Set the basis in your software before your first update, due 7 August 2027.
  4. If you choose accruals, agree how year-end adjustments will be made.

Not sure if you are in scope? Try our MTD checker and read about qualifying income. Landlords should also see MTD for landlords.

Frequently asked questions

Do I have to use cash basis for MTD for Income Tax?

No. Cash basis is the default, but you can choose traditional (accruals) accounting instead and make year-end adjustments in your MTD software.

Is there a turnover limit for cash basis?

Not for sole traders since 6 April 2024. For property businesses, cash basis is the default only where cash receipts are £150,000 or less.

Can a limited company use cash basis?

No. Limited companies, LLPs and partnerships with corporate partners cannot use cash basis.

When do I make accruals adjustments under MTD?

After you send your fourth quarterly update and before you submit your tax return. HMRC’s software guidance says the adjustments are made to the annual totals.

Can I use different methods for two businesses?

Yes. GOV.UK says that if you have more than one business you can choose cash basis or traditional accounting for each one.

Sources

Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance on 6 November 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.