How to calculate profit

“Are you actually making money?” The only honest way to answer is to calculate your profit. It sounds obvious, but plenty of businesses confuse revenue with profit — and revenue alone can’t pay your tax bill. Here’s the calculation, simply.

The basic formula

Profit = revenue − costs

• Revenue — everything your business earns from sales
• Costs — everything it costs to earn that revenue
• Profit — what’s left, which belongs to you (or is subject to tax)

Gross profit vs net profit

These two numbers answer different questions:

• Gross profit = revenue − cost of sales (the direct cost of what you sell: materials, stock, subcontract labour). It tells you whether your core product is priced sensibly.
• Net profit = gross profit − all other running costs (rent, utilities, marketing, insurance, software, admin, accountancy). It’s your true bottom line and the figure HMRC taxes.

Worked example — a small creative business.

• Revenue: £80,000
• Cost of sales (materials & subcontractors): £30,000
• Gross profit: £50,000 (62.5% gross margin)
• Running costs (software, marketing, insurance, home office): £12,000
• Net profit: £38,000
• Net profit margin: 47.5%

Profit margin — the useful ratio

Net profit margin = net profit ÷ revenue × 100

Margins let you compare your business against itself month on month, and against others in your industry. A falling margin is a warning light even when revenue is rising.

Tax is charged on net profit

If you’re a sole trader, income tax and Class 4 NI are based on your net profit — after allowable expenses. If you run a limited company, corporation tax is charged on the company’s net profit. This is why recording expenses properly matters so much. See our allowable business expenses guide for what you can deduct.

Profit ≠ cash

Profit is an accounting figure measured over a period. Cash is what’s in your bank account today. You can be profitable on paper while waiting for customers to pay invoices — which is why healthy cash flow matters just as much. Read our cash flow explained guide for the difference.

See your tax on that profit

Once you know your net profit, the self-employed tax calculator shows your income tax and NI bill, and the corporation tax calculator does the same for a limited company.