Your taxable profit is the figure your Income Tax and National Insurance are charged on, not the money that lands in your bank account. For a UK sole trader it is your business income for the tax year, less your allowable business expenses, less any capital allowances, with a few items added back. For 2026/27 you pay tax on the profit above your £12,570 Personal Allowance.
Most self-employed people confuse turnover with profit, and profit with taxable profit. They are three different numbers. This guide walks through exactly how to get from the money your business took in to the taxable profit HMRC uses, with a worked 2026/27 example, the cash basis rules that now apply by default, and how much tax and National Insurance you end up paying. Every figure below was re-checked against gov.uk on 23 October 2026.
What is taxable profit?
Taxable profit is your business income for the tax year minus your allowable expenses and capital allowances, adjusted for anything the tax rules disallow. It is not the same as the cash in your account, nor the same as the accounting profit in your records, because tax law does not let you deduct every cost and taxes some income your accounts might not show.
The basic calculation for a sole trader is:
- Business income (turnover) for the tax year
- less allowable business expenses
- less capital allowances on equipment (if you use traditional accounting)
- plus any disallowed costs added back
- equals your taxable profit.
Since the 2024/25 tax year, all sole traders are taxed on a tax-year basis, so your profit is measured for the year to 5 April (HMRC treats 31 March as the same thing). If your accounting year runs to a different date, you apportion your profits to the tax year, which our guide to basis period reform for sole traders explains in full.
How do you work out your taxable profit step by step?
You work out your taxable profit in three steps: total your income, subtract your allowable expenses, then deal with any equipment through capital allowances. Do this for the tax year to 5 April. The result is the profit figure you enter on your Self Assessment tax return.
Step 1: Total your business income
Add up all the income your business earned in the tax year, before any costs. This is your turnover: sales, fees, commission, tips and any other trading income. If you use the cash basis, you count income when the money actually reaches you; if you use traditional accruals accounting, you count it when you invoice or earn it, even if the customer has not yet paid.
If your total self-employed income is £1,000 or less in the tax year, the £1,000 trading allowance means you usually do not need to report it or pay tax. Above £1,000 you must register for Self Assessment and work out your profit.
Step 2: Deduct your allowable expenses
Subtract the costs you are allowed to claim. According to GOV.UK, allowable expenses are costs incurred "wholly and exclusively" for the business, such as stock, office costs, travel, a proportion of home and phone costs, insurance, accountancy fees and staff wages. Private spending and client entertaining are not allowable. Our full list of allowable expenses for sole traders shows what you can and cannot claim.
Income minus allowable expenses gives your net profit. For many sole traders on the cash basis that is already the taxable profit, because the cash basis treats most equipment as a normal expense when you pay for it rather than through capital allowances.
Step 3: Claim capital allowances on equipment
If you use traditional accounting, larger items you keep and use in the business (tools, machinery, a computer, a van) are "capital" rather than day-to-day costs, so you claim them through capital allowances instead of as an expense. The main routes for 2026/27 are set out below.
| Allowance | What it covers | Rate (2026/27) |
|---|---|---|
| Annual Investment Allowance (AIA) | Most plant and machinery | 100% up to £1,000,000 |
| Main-rate first-year allowance | New main-pool assets bought on or after 1 Jan 2026 | 40% in year one |
| Writing-down allowance, main pool | Remaining main-pool balance | 14% a year (reducing balance) |
| Writing-down allowance, special rate pool | Cars over set emissions, integral features | 6% a year |
The main-pool writing-down rate dropped from 18% to 14% for Income Tax from 6 April 2026, and a new 40% first-year allowance applies to main-rate expenditure from 1 January 2026, per GOV.UK. Most sole traders simply use the AIA to write off equipment in full. Cars do not qualify for the AIA.
A worked 2026/27 example
Priya is a self-employed graphic designer using the cash basis for the year to 5 April 2027. The table shows how her taxable profit is built up.
| Item | Amount |
|---|---|
| Business income received (turnover) | £60,000 |
| Less allowable expenses (software, home office, travel, new laptop) | (£18,000) |
| Taxable profit | £42,000 |
Priya's taxable profit is £42,000, even if some clients paid late and her bank balance looks different. That £42,000 is the figure she reports, and the figure her Income Tax and National Insurance are calculated on. You can sanity-check your own position with our self-employed tax calculator.
Cash basis or traditional accounting?
Since 2024/25 the cash basis is the default method for self-employed trading income, and you must opt out on your tax return if you want traditional accruals accounting. The cash basis records income and expenses when money changes hands; traditional accounting records them when they are earned or incurred. The table compares the two.
| Cash basis (default) | Traditional accruals | |
|---|---|---|
| Income counted when | Money is received | Invoice is raised |
| Expenses counted when | Money is paid | Cost is incurred |
| Equipment | Usually a normal expense when paid | Claimed via capital allowances |
| Best for | Most smaller, simpler businesses | Stock-heavy or larger businesses |
GOV.UK confirms the cash basis is now the default and that you "must opt out if you want to use traditional accounting", on the business records pages. Our guide to the cash basis versus accruals helps you choose.
Why is taxable profit different from accounting profit?
Taxable profit differs from the accounting profit in your records because tax law disallows certain costs and replaces others. The most common adjustments are adding back items you cannot claim and swapping depreciation for capital allowances. Common "add-backs" that increase your taxable profit include:
- Client entertaining and most business gifts;
- Depreciation of equipment (replaced by capital allowances under traditional accounting);
- The private-use proportion of costs such as your car, phone or home;
- Fines and penalties, for example parking fines;
- Your own wages or drawings, which are not a business expense.
This is why two businesses with the same bank balance can owe very different tax. Getting the add-backs right is a core part of self-employed bookkeeping, and it is where an accountant usually pays for themselves.
How much tax and National Insurance do you pay on taxable profit?
Your taxable profit is added to your other income and taxed at the normal Income Tax rates, and you also pay Class 4 National Insurance on it. For 2026/27 the rates are set out below, taking Priya's £42,000 taxable profit as the example.
| Charge | Rate (2026/27) | On Priya's £42,000 profit |
|---|---|---|
| Personal Allowance | £12,570 tax-free | £0 |
| Income Tax, basic rate | 20% on £12,571 to £50,270 | £5,886 |
| Class 4 NIC | 6% on £12,570 to £50,270 | £1,765.80 |
| Class 2 NIC | Not due (profit above £7,105) | £0 |
| Total | £7,651.80 |
Profit above £50,270 is taxed at 40% Income Tax and 2% Class 4 NIC, and above £125,140 at 45%, per GOV.UK. Class 2 NIC is no longer compulsory, but if your profit is below the £7,105 Small Profits Threshold you can pay it voluntarily at £3.65 a week to protect your State Pension record. Because the tax is not taken at source, set money aside as you go, which our guide on how much to put aside for tax covers.
Work out your self-employed tax →
Sources
- Expenses if you are self-employed, GOV.UK
- Business records if you are self-employed (cash basis default), GOV.UK
- Work out your capital allowances: rates and pools, GOV.UK
- Income Tax rates and Personal Allowances, GOV.UK
- Self-employed National Insurance rates, GOV.UK
- Tax-free allowances on property and trading income, GOV.UK
Not sure your profit figure is right? Book a free call with a Zmartly accountant and we will check your expenses, capital allowances and tax so you pay the right amount and not a penny more. Talk to a Zmartly accountant.
Frequently asked questions
What is the difference between turnover and taxable profit?
Turnover is the total income your business earns before any costs. Taxable profit is what is left after you deduct allowable expenses and capital allowances and add back any disallowed items. You pay Income Tax and National Insurance on the taxable profit, not on your turnover, so the two numbers can be very different.
How do I work out my taxable profit as a sole trader?
Add up your business income for the tax year to 5 April, subtract your allowable business expenses, then subtract any capital allowances on equipment if you use traditional accounting. Add back disallowed costs such as client entertaining and your own drawings. The result is your taxable profit for Self Assessment.
Do I deduct expenses before or after tax?
You deduct allowable expenses before tax. Expenses reduce your taxable profit, which in turn reduces the Income Tax and Class 4 National Insurance you owe. This is why keeping accurate records of every allowable cost matters: each £100 of genuine expense you miss can cost a basic-rate sole trader £26 in extra tax and NIC.
Is taxable profit the same as the money in my bank account?
No. Even on the cash basis, your bank balance reflects drawings, tax set aside and money moving in and out, while taxable profit is strictly income less allowable costs for the tax year. On traditional accounting they differ even more, because income is counted when invoiced rather than when paid.
What expenses are not allowed when working out taxable profit?
Client entertaining, most business gifts, fines and penalties, your own wages or drawings, and the private-use share of mixed costs such as your car or phone are not allowable. Depreciation is also disallowed under traditional accounting and is replaced by capital allowances. These items are added back when you work out taxable profit.
