Last updated: 14 October 2026
How do you work out your taxable profit for the year?
Your taxable profit is your business income for the tax year, minus allowable expenses, minus capital allowances (or plus any balancing adjustments), with any private-use and disallowable costs added back. For sole traders and partners, profits are now taxed on a tax-year basis, 6 April to 5 April, following basis period reform. Since 2024/25, the cash basis is the default for sole traders and partnerships, with no turnover limit, which means you count money when it is received or paid.
Step by step
- Add up your income: all sales and fees received, including card payments and cash
2. Add other business income: such as grants, tips or the value of goods taken for your own use
3. Deduct allowable expenses: costs incurred wholly and exclusively for the business
4. Deduct capital allowances: or include equipment as an expense under the cash basis
5. Add back disallowable items: client entertaining, fines, private use shares
6. Claim the trading allowance instead, if your expenses are less than £1,000
Example
| Item | Amount |
| Sales | £48,000 |
| Materials | −£9,000 |
| Van costs (80% business use) | −£4,000 |
| Phone and software | −£900 |
| Insurance | −£700 |
| Accountancy | −£600 |
| New laptop (cash basis) | −£1,200 |
| Client lunches (disallowable) | £0 |
| Taxable profit | £31,600 |
On £31,600, income tax is about £3,806 and Class 4 NIC (6%) about £1,142, after the £12,570 Personal Allowance.
Cash basis or traditional accounting?
| Cash basis | Traditional (accruals) |
| Count money when received or paid | Count income when earned and costs when incurred |
| Simpler; no stock or debtor adjustments | Required for some businesses, and better for large or complex ones |
| Equipment can usually be expensed | Equipment goes through capital allowances |
You can opt out of the cash basis if traditional accounting suits you better, for example if you hold a lot of stock or want income matched to the period you earned it.
Losses under the cash basis
Under the cash basis, you can now set losses against other income and carry them back in the same way as traditional accounting, following the 2024 changes. Check the conditions before you claim.
Using the trading allowance
If your expenses are low, you can deduct the £1,000 trading allowance instead of actual expenses. If your gross trading income is £1,000 or less, you don’t need to report it.
Basis period reform
Since 2024/25, profits are taxed for the tax year itself. If your accounting year ends on another date, such as 31 December, you must apportion profits from two accounting periods. Using a 31 March or 5 April year-end avoids this.
Making Tax Digital
From April 2026, sole traders and landlords with qualifying income over £50,000 must keep digital records and send quarterly updates. The threshold falls to £30,000 in April 2027 and £20,000 in April 2028.
Frequently asked questions
Is profit the same as drawings?
No. Drawings are money you take out; tax is on profit.
Can I deduct my own wages?
No, sole traders can’t deduct drawings.
What if I make a loss?
You may be able to set it against other income. See your accountant.
Do I include VAT?
If you’re VAT-registered, exclude VAT from income and expenses.
Related: business expenses and Annual Investment Allowance for sole traders.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with working out your taxable profit. See our sole trader accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
