Important Update for unincorporated businesses: Changes to the Way Your Business Profits Are Declared

Date posted: 11th Jul 2025

From the 2024/25 tax year, HMRC have made a change to how most sole traders and partnerships (excluding LLPs and partnerships with corporate members) calculate their business profits for tax purposes.

What’s Changing?

Up to and including the 2023/24 tax year, businesses could choose between two ways of calculating profit:

1. The accruals basis (matching income and expenses to the period they relate to), or
2. The cash basis (looking at money received and paid out during the year).

The cash basis was only available to smaller businesses and required a formal election to use it.

From 6 April 2024 (2024/25 tax year), the cash basis becomes the default method for most sole traders and eligible partnerships—regardless of turnover. A business can still declare on the accruals basis of accounting but will need to elect to do so.

What Does the Cash Basis Mean for You?

Under the cash basis, your taxable profit is based on the actual money received and paid out in the tax year, rather than when the income was earned or the expenses were incurred. This can make things simpler, especially for smaller businesses.

Key Benefits of the New Rules:

1. Simplified accounting: Easier to match your tax to your bank account activity.
2. Wider access: No income threshold to restrict use.
3. Improved loss relief: You can now offset business losses against other income or carry them back, just like under the accruals basis.
4. Full deduction for interest costs: The previous £500 limit on loan interest deductions has been removed.

Points to Consider:

1. Businesses with more complex needs—such as those with significant stock, long-term contracts, or larger borrowing arrangements—may still prefer the accruals basis.
2. If you’re transitioning from the accruals basis to the cash basis (or vice versa), we’ll ensure all income and expenses are correctly accounted for to avoid any duplication or omissions.

Next Steps

As we start preparing your 2024/25 accounts and tax return, we’ll assess whether the cash basis is suitable for you. If we believe using the accruals method is in your best interest, we’ll discuss this with you.

Got Questions?

Please don’t hesitate to contact us if you’d like to discuss what this change means for your business.