Net profit is the true bottom line, what is left after every cost of running the business has been taken out. For the self-employed, it is also the number HMRC taxes.
There is a number every self-employed person eventually has to confront, and it is not how much they invoiced or how busy they were. It is what was actually left once the bills were paid. That figure is net profit, and for a sole trader it is the single number HMRC builds an entire tax bill on top of.
Net profit sits at the end of a chain. You start with turnover, the total income from sales. From that you subtract the direct cost of what you sold to reach gross profit. Then you subtract everything else it takes to run the business, the overheads, and what is left is net profit. In a single line:
Net profit = Total income − Cost of sales − Overheads
The distinction between cost of sales and overheads is what separates net profit from gross profit. Cost of sales are the costs tied directly to producing a sale: stock, raw materials, the goods you bought to resell. Overheads are the standing costs of being in business at all: rent, insurance, software subscriptions, accountancy fees, bank charges and marketing. Two businesses can have the same gross profit but very different net profit if one carries far heavier overheads than the other.
For a sole trader, net profit is identical to the taxable trading profit reported on the Self Assessment return. There is no salary to deduct, because a sole trader is not an employee of their own business; the net profit is the owner's reward, and it is taxed in full above the Personal Allowance.
Leah runs a small online homeware shop as a sole trader. Her 2025/26 figures break down like this:
| Item | Amount |
|---|---|
| Turnover (sales) | £62,000 |
| Cost of stock sold | −£24,000 |
| Gross profit | £38,000 |
| Rent and storage | −£4,800 |
| Packaging and postage | −£3,200 |
| Software and platform fees | −£2,400 |
| Insurance and accountancy | −£1,600 |
| Net profit | £26,000 |
Leah's turnover is £62,000, but she is taxed on neither that nor her £38,000 gross profit. Her net profit of £26,000 is the figure HMRC uses. Against the £12,570 Personal Allowance, £13,430 is taxable at the 20% basic rate, around £2,686 of income tax, plus Class 4 National Insurance at 6% in 2025/26 on profit above £12,570. You can model the full bill, including National Insurance, with the sole trader tax calculator.
It is easy to be seduced by a big turnover figure, but turnover pays no bills and feeds no household. Net profit is what is genuinely available to live on, reinvest, or save for the tax bill. A business turning over £100,000 with £95,000 of costs is in a far weaker position than one turning over £40,000 with £15,000 of costs, despite the smaller top line.
Net profit is also where tax planning bites. Because HMRC taxes net profit rather than turnover, every allowable expense you correctly record shaves money off your profit and therefore your tax. Under Making Tax Digital for Income Tax, starting April 2026 for sole traders and landlords with qualifying income over £50,000, you will keep digital records and submit quarterly updates that track income and expenses as they happen. That continuous view of your running net profit makes it far easier to set money aside for tax and to spot a thin margin before it becomes a crisis.
Turnover is vanity, net profit is sanity. The first impresses people; the second pays the tax bill.
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