It is the one document that turns a year of invoices and receipts into a single number, your profit, and that number is exactly what HMRC taxes. Get it right and the tax follows.
Behind every self-employed tax bill is one calculation that decides everything: income minus expenses. The document that captures it is the profit and loss statement, and for a sole trader it is not just bookkeeping admin, it is the very number HMRC reaches into your bank account for.
A profit and loss statement, also called a P&L or income statement, lays out the financial story of a business over a set period, typically a tax year, in three layers. At the top is income, dominated by your turnover from sales. In the middle are the costs of running the business. At the bottom is what remains: profit if income exceeds costs, a loss if it does not.
The structure makes the maths visible. You start with the money coming in, subtract the money going out, and the result is the figure that matters for tax. For a sole trader, there is no hiding place: the bottom line is the basis for your tax.
The income section captures everything the business earns: sales, fees, and any other trading income. The expenses section lists the allowable expenses you can deduct, the costs incurred wholly and exclusively for the business, such as stock, tools, travel, software, professional fees, and a fair share of working-from-home costs.
What makes the difference between a small tax bill and a large one is which expenses you correctly claim. Personal costs are not allowable, but legitimate business costs reduce your profit pound for pound, and therefore reduce your tax.
Ravi is a self-employed photographer. Over 2025/26 his profit and loss statement looks like this:
| Item | Amount |
|---|---|
| Turnover (shoot fees) | £48,000 |
| Equipment and software | −£4,500 |
| Travel and mileage | −£2,100 |
| Studio hire | −£3,600 |
| Insurance and fees | −£1,200 |
| Profit | £36,600 |
His turnover is £48,000, but he is not taxed on that. After deducting £11,400 of allowable expenses, his profit is £36,600, and that is the figure HMRC uses. Against the £12,570 Personal Allowance, £24,030 is taxable at the 20% basic rate, roughly £4,806 of income tax, plus Class 4 National Insurance on profit above £12,570 (6% in 2025/26 up to £50,270). You can model the full bill, including National Insurance, with the sole trader tax calculator.
Two sole traders with identical turnover can owe wildly different tax. The profit and loss statement is where that difference is decided.
The profit and loss statement is about to become a more frequent companion for the self-employed. Under Making Tax Digital for Income Tax, beginning April 2026 for sole traders and landlords with qualifying income over £50,000, you must keep digital records and submit quarterly updates to HMRC. Each update is, in effect, a running profit and loss summary: cumulative income and categorised expenses for the year to date. Rather than assembling a single P&L once a year for your tax return, you maintain it continuously throughout the year, which is far easier when income and expenses are categorised automatically as they happen rather than reconstructed in a January scramble.
TapTax connects to your bank, categorises expenses automatically, and submits quarterly updates to HMRC. Free plan, no card required.
