Gross profit strips out the cost of what you sold to reveal your trading margin. It sits above net profit and tells you whether your core product or service makes money at all.
Ask a shopkeeper what they make on a £10 product and they will not start with rent or insurance. They will tell you what it cost them to buy and what is left when it sells. That gap, before any of the wider running costs are considered, is gross profit, and it is the cleanest measure of whether the thing you sell actually makes money.
Gross profit answers a single question: after paying for what I sold, how much is left? The formula is deliberately narrow:
Gross profit = Total income − Cost of sales
Cost of sales (also called cost of goods sold) covers only the costs directly tied to producing a sale: stock you bought to resell, raw materials, and in some trades the direct labour or subcontract cost of delivering the work. Crucially, it excludes overheads, the standing costs of running the business such as rent, software, insurance and marketing. Those come out later, when you move from gross profit down to net profit.
Gross profit is frequently turned into a percentage, the gross profit margin, by dividing it by turnover. A 40% margin means that for every £100 of sales, £40 remains after the cost of sales. Margins make it easy to compare one product, service line or trading period against another, and to spot when rising supplier costs are quietly eroding profitability.
Tom runs a sole trader furniture-making business. His 2025/26 figures show clearly where gross profit sits relative to turnover and net profit:
| Item | Amount |
|---|---|
| Turnover (sales) | £80,000 |
| Timber and materials | −£28,000 |
| Direct subcontract labour | −£12,000 |
| Gross profit | £40,000 |
| Workshop rent | −£7,200 |
| Tools, insurance, software | −£3,800 |
| Marketing and accountancy | −£2,000 |
| Net profit | £27,000 |
Tom's gross profit of £40,000 gives a gross margin of 50% (£40,000 ÷ £80,000), a healthy figure that tells him his core making and selling is sound. But gross profit is not the end of the story. After deducting £13,000 of overheads, his net profit is £27,000, and that is the figure HMRC taxes. Against the £12,570 Personal Allowance for 2025/26, £14,430 is taxable at the 20% basic rate, plus Class 4 National Insurance at 6% on profit above £12,570. See the full picture, including the link from these figures to a tax bill, on the profit and loss page.
Gross profit is the early-warning system of a business. If your gross margin is too thin, no amount of cutting overheads will rescue you, because the problem lies in the core trade itself: you are not charging enough or paying too much for what you sell. A falling gross margin over several periods is one of the first signs that supplier prices, pricing strategy or product mix need attention.
For the self-employed, the practical value is in diagnosis. Net profit tells you the final result; gross profit tells you why. A sole trader whose net profit has slipped can look at gross profit to see whether the cause is the cost of sales eating into margins, or overheads creeping up. Keeping income and costs categorised throughout the year, which is exactly what Making Tax Digital for Income Tax will require from April 2026 for those with qualifying income over £50,000, makes both figures visible at any moment rather than only once a year.
Gross profit tells you whether your trade works. Net profit tells you whether your business does.
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