The short version: Profit is what’s left after you subtract your costs from your income. It’s the number that matters for tax because that’s what HMRC taxes you on.
Who talks about profit?
Self employed people, landlords, and anyone who sells assets. Employees don’t have profit, they have income.
How do you calculate it?
For self employment: total income minus allowable business expenses. For rental: rental income minus allowable property expenses. For selling assets: sale price minus purchase price (and allowable costs).
What about losses?
If your costs exceed your income, you’ve made a loss. Sometimes you can use losses to reduce tax in other areas or carry them forward to offset future profits.
Why does it matter?
You’re taxed on profit, not turnover. A business with £100,000 turnover but £90,000 costs makes £10,000 profit and pays tax on that. Keeping accurate records of expenses directly reduces your tax bill.
Want to make sure you’re calculating your profit correctly? Let us review your numbers.
