How do sole traders calculate profit in the UK?

How sole traders calculate profit in the UK

If you’re a UK sole trader, “profit” is more than just what’s left in your bank account at the end of the month. Profit is a calculated figure that sits at the heart of your tax return, helps you understand how well your business is doing, and guides practical decisions like pricing, spending, and how much you can safely pay yourself. Calculating profit sounds simple, but real life introduces complications: invoices that haven’t been paid yet, costs that are partly personal and partly business, equipment you’ll use for years, mileage and travel, stock, refunds, subscription services, and expenses paid on different dates.

This guide explains how sole traders calculate profit in the UK in a clear, practical way. It covers the two common accounting methods (cash basis and traditional accruals), what counts as income and allowable expenses, how to handle tricky categories like vehicles and home working, and how to keep records that make profit calculations fast and defensible. Throughout, you’ll see how a simple invoicing and record-keeping workflow can make your profit figure more accurate and far less stressful. If you’re using a free invoice app like invoice24, you can bring invoicing, payment tracking, and basic business admin into one place, which makes profit calculations significantly easier to maintain throughout the year instead of scrambling at the end.

What “profit” means for a UK sole trader

In everyday language, profit often means “money I earned after paying bills.” For UK sole traders, profit usually refers to your business profit for a tax year: your business income minus your allowable business expenses. It’s not the same as drawings (what you take out of the business), and it’s not automatically the same as what you can spend. You might have a profitable year on paper but still be short of cash if customers pay late. Or you might have cash in your account but low profit because you had big costs that were allowable for tax.

For most sole traders, the key profit figure is the one used to calculate Income Tax and National Insurance. You’ll also care about “net profit” as a performance measure: how efficiently your business turns sales into earnings. Understanding your profit helps you answer questions like:

• Are my prices high enough to cover costs and tax?
• How much can I set aside for tax without panic?
• Which services or products are genuinely profitable?
• Can I afford to invest in equipment, marketing, or help?

Profit is also a confidence builder. When you can see your numbers clearly, you’ll make better decisions. And that clarity comes from two things: using the right accounting method for your situation and keeping consistent records.

Two main ways to calculate profit: cash basis vs traditional accounting

UK sole traders generally calculate profit using one of two approaches:

1) Cash basis (cash accounting)
You record income when you receive money and record expenses when you pay them. Profit is basically cash-in minus cash-out for business activities, adjusted for a few specific rules.

2) Traditional accounting (accruals basis)
You record income when you earn it (when you invoice or deliver the work, depending on your terms) and record expenses when you incur them (when you receive the bill or use the service), not necessarily when cash moves. Profit is based on matching income and related costs to the same period.

Many sole traders use cash basis because it’s simpler to run day-to-day. If you primarily provide services, have straightforward costs, and you want to understand what’s happening in your bank account, cash basis can be a comfortable fit. Traditional accounting can provide a more accurate picture of performance for businesses with stock, complex projects spanning months, or large unpaid invoices at year-end. Either way, you must keep records that support your figures.

Whichever method you use, you’ll find the work much easier if your invoicing is tidy. A free invoice app like invoice24 helps you issue professional invoices, track who has paid, and keep a clear list of outstanding amounts. That visibility matters whether you’re cash basis (so you can chase payments and forecast cash) or accruals (so you can see what you’ve earned even if it hasn’t been paid yet).

Step-by-step: the basic profit calculation

At its simplest, sole trader profit calculation follows this structure:

Profit = Total business income − Total allowable business expenses

That’s the core idea, but the details depend on:

• Your accounting method (cash basis or accruals).
• Whether you have any non-standard items (assets, private use adjustments, stock).
• Whether you are VAT registered (which changes how you record VAT in income and expenses, depending on the VAT scheme you use).

Start by gathering your income records (invoices, payments received, sales receipts, platform statements). Then gather your expense records (receipts, bills, bank statements, mileage logs). Once you’re confident you have everything, you categorise them and total each category.

Many people only calculate profit once a year. A better approach is to calculate it regularly—monthly or quarterly—so you can spot issues early. This is exactly where a lightweight invoicing workflow shines. When your invoices are already organised and you can see what’s paid vs unpaid, you’ve removed one of the biggest barriers to “live” profit tracking.

What counts as income for a sole trader

Business income generally includes the money you earn from trading. Depending on your business, it could include:

• Sales of goods or products.
• Fees for services.
• Deposits and advance payments (treatment can differ by accounting method).
• Tips or service charges you keep.
• Commission and referral income.
• Online platform payouts (after fees, depending on how statements are presented).
• Grants or support payments related to trading (where applicable).
• Barter transactions (if you exchange services, you may need to account for the value).

Under cash basis, you normally count income when you actually receive it. Under accruals, you count income when you’ve earned it, which often aligns with the invoice date or the completion of the work, depending on your circumstances.

One common pitfall is confusing “invoiced” with “paid.” If you invoice a client on 28 March but they pay you on 10 April, that’s a different tax year boundary question depending on method. With invoice24, you can keep a clean trail: the invoice date, the due date, and the payment status. This makes it far easier to assign income to the right period and to chase overdue invoices before they become a bigger problem.

Allowable expenses: what you can usually deduct

Allowable expenses are business costs that are wholly and exclusively for your trade. In plain terms, if you bought it purely for business purposes and it’s a normal cost of running your business, it’s usually allowable. Common allowable expenses for sole traders include:

• Office costs (stationery, printing, postage).
• Travel costs (fuel, public transport, parking, accommodation for business trips).
• Clothing (only protective clothing or specialist workwear, not everyday clothes).
• Staff costs (wages, freelancers, subcontractors).
• Things you buy to sell (stock, raw materials).
• Business premises costs (rent, utilities).
• Insurance (public liability, professional indemnity, business insurance).
• Marketing and advertising (ads, website costs, business cards).
• Training (if it maintains or improves skills for your existing business).
• Professional fees (accountant, legal fees for business matters).
• Bank charges (business account fees, card processing fees).
• Phone and internet (business portion).
• Software subscriptions (including invoicing tools that keep admin efficient).

Not every expense is automatically allowable. Some costs are restricted, some must be treated differently, and some need apportionment if there’s personal use. The key is to keep evidence and keep notes. A small note like “client meeting travel” or “materials for Job #143” can be the difference between an expense being confidently allowable and being questioned later.

Expenses that are partly personal and partly business

Many sole traders use the same phone, vehicle, or home space for both personal life and business. In these cases, you typically claim only the business proportion. This is known as apportionment. Examples:

Phone and internet
If you use your phone 60% for business calls and 40% personal, you usually claim 60% of the cost.

Home working
If you work from home, you might claim a portion of household costs (like utilities) based on a reasonable method, or use a simplified expenses approach if that’s suitable.

Vehicle costs
If you use a car for both business and personal travel, you either track business mileage and apply an approved mileage rate (simpler) or calculate actual vehicle costs and claim the business proportion (more detailed). You generally choose an approach and stay consistent for that vehicle.

The practical challenge isn’t the maths—it’s the record keeping. You need enough information to back up the percentage you claimed. A mileage log, call records, or a reasonable household apportionment method can do the job. If you’re recording invoices and jobs properly (for example, with invoice24), it becomes easier to link travel and other expenses to specific client work, which supports your business-use reasoning.

Cash basis profit calculation: a practical example

Let’s say you’re a freelance designer using cash basis for the tax year. You receive payments totalling £45,000 during the year. You paid these business costs:

• Software subscriptions: £720
• Laptop (treated as an allowable purchase under cash basis rules for many small businesses, depending on circumstances): £1,200
• Advertising: £900
• Travel: £650
• Phone and internet (business share): £480
• Accountant: £600
• Other supplies: £350

Your total expenses: £4,900

Your profit would be:

£45,000 − £4,900 = £40,100

That’s the profit figure you’d generally use for tax calculations under cash basis (assuming those expenses are allowable and treated correctly).

The big advantage of cash basis is that it tracks what happened in your bank account. The big disadvantage is that it can distort performance in businesses where unpaid invoices or timing issues are significant. If you did a lot of work in March but clients paid in April, your “profit” can appear lower for the year even though you earned the income. This is why tracking outstanding invoices matters. Invoice24 helps you see what you’re owed at any moment, which protects your cashflow and gives context to the profit figure you’re calculating.

Traditional (accruals) profit calculation: matching income and expenses

Under traditional accounting, you aim to match income and related expenses to the period they relate to. That means you consider:

• Debtors: invoices you’ve issued but not yet been paid.
• Creditors: bills you owe but haven’t paid yet.
• Prepayments: expenses paid in advance for future periods (like annual insurance).
• Accruals: expenses incurred but not yet billed (like utility usage before the bill arrives).
• Stock: if you hold inventory, you account for changes in stock levels.

Here’s a simple accruals example. You invoice £60,000 worth of work during the year, but only £55,000 is paid by year end. You also receive £2,000 in April that relates to invoices issued before the year started. Under accruals, your income is generally based on what you earned in the year: £60,000 (not just what was paid). Your expenses are based on what you used/incurred in the year, even if some bills are unpaid at year end.

Accruals can be more accurate for understanding performance, but it’s more admin-heavy. This is where your invoicing system matters. If you can easily pull a list of invoices issued in the year and their statuses, you can support your income figure without digging through emails and spreadsheets. Using invoice24 to keep invoices organised gives you a neat starting point for accruals calculations, and it makes year-end totals far less painful.

Capital items and equipment: why big purchases aren’t always “just an expense”

When you buy something that lasts a long time—like a laptop, camera, specialist tools, or machinery—you’re buying an asset rather than a day-to-day running cost. The treatment can differ depending on accounting method and circumstances. Many sole traders hear “you can claim it as an expense” and stop thinking. But the correct approach can involve capital allowances or different rules about what is deductible and when.

In practical terms, for many small sole traders, the tax system allows relief for business equipment, but it’s important to record the purchase properly and understand whether it’s treated as a straightforward deduction or via capital allowances. If you use the item partly for personal use, you may need to claim only the business portion.

The key admin tip is simple: keep the receipt, note the business use percentage if relevant, and record what the item is and when you started using it. If you track projects and invoices in one place, you can often justify why an item was needed for business. For example, you might note that a printer was purchased to handle increased invoicing volume or that a laptop was required for client work. When your paperwork is tidy, you spend less time defending it and more time running your business.

Home working: two common approaches

If you work from home, you can often claim expenses for the business use of your home. There are broadly two ways people do this:

1) A simplified expenses approach
This uses a flat-rate method based on the number of hours you work from home. It’s simpler and reduces the need for detailed calculations.

2) A detailed apportionment approach
You calculate the business share of household costs such as electricity, heating, council tax, mortgage interest or rent (where applicable), and internet. The share is often based on the number of rooms used for business and time spent working.

Whichever method you use, keep it reasonable and consistent. The goal is to reflect genuine business use. Avoid trying to claim everything—over-claiming is rarely worth the stress. A practical strategy is to choose one method and stick with it unless your circumstances change significantly.

If your invoicing and client work tracking are consistent (for example, you issue all invoices through invoice24), it’s easier to show that your home really is your business base: your invoices, client communications, and work records support the reality of home working. It’s not about “proving” something in a dramatic way; it’s about keeping a coherent story in your records.

Vehicle and travel: mileage vs actual costs

Travel is a common expense category and a common area of confusion. There’s a difference between:

• Business travel (allowable): travelling to a client site, attending business meetings, going to buy materials, etc.
• Ordinary commuting (usually not allowable): travelling from home to a permanent workplace in a way that’s essentially commuting.

For cars and vans, many sole traders prefer mileage tracking because it is simpler: you record business miles and claim a set rate per mile. The alternative is tracking actual vehicle costs (fuel, insurance, repairs, finance interest where applicable) and then claiming the business proportion.

Mileage tracking requires a log: date, journey purpose, start and end points (or at least a clear description), and miles. It sounds tedious, but you can keep it lightweight. Many sole traders capture mileage weekly. The benefit is that your profit calculation becomes more predictable, and you avoid messy “guesswork” at year-end.

Invoice24 can help indirectly here because good invoicing habits often tie back to specific jobs and dates. If you know what work you did on which day (because that’s when you invoiced or logged the job), you can more easily reconcile travel to business activities.

Stock and cost of goods sold: calculating profit for product-based businesses

If you sell physical products, profit calculation includes the cost of goods sold. This is the cost of items you actually sold during the period, not necessarily what you purchased. That’s where stock comes in.

A simplified way to think about it is:

Cost of goods sold = Opening stock + Purchases − Closing stock

Then your gross profit is:

Gross profit = Sales − Cost of goods sold

After that, you subtract your running expenses (rent, marketing, software, postage, etc.) to reach net profit.

This matters because if you buy a lot of stock in March but don’t sell it until later, treating all purchases as “expenses” immediately can make profit look artificially low for that year. Traditional accounting handles this more accurately, but even under simpler approaches you still need to understand stock movement to know your real margins.

Regardless of method, the foundations are: track sales consistently, keep purchase receipts, and do a basic stock count at key points. A clean invoicing process helps because every sale is documented. If you use invoice24 for invoices and sales records, you’re building a clear sales ledger that feeds directly into profit calculations.

VAT and profit: what changes if you’re VAT registered

VAT can confuse profit calculations because VAT is not usually your money (it’s tax you collect on behalf of HMRC, subject to the rules of your VAT scheme). If you’re VAT registered, the way you record VAT in income and expenses depends on your scheme and your bookkeeping setup.

Many sole traders find it easiest to think in “net of VAT” terms: sales income excluding VAT and expenses excluding VAT. That way, the VAT element is handled separately as VAT payable or VAT reclaimable. If you treat gross figures (including VAT) as income and expenses, your profit can be overstated or understated unless you make adjustments.

If VAT registration is part of your journey, staying organised becomes even more important. Your invoicing system should clearly show VAT where applicable, keep invoice numbering consistent, and store invoice histories. This is another area where invoice24 can reduce admin stress: professional invoices, consistent records, and a clearer picture of who owes what.

Common mistakes that distort profit calculations

Even hardworking sole traders can end up with a misleading profit figure if records aren’t consistent. Here are some of the most common issues to avoid:

1) Missing income
Small cash payments, platform payouts, and “quick jobs” can slip through. If you’re issuing invoices reliably, it’s much harder to forget sales. Using invoice24 as your default invoicing method helps ensure every job leaves a paper trail.

2) Mixing business and personal spending
Using one bank account for everything makes it harder to total expenses accurately. If you do mix, you need a clear system to identify what’s business. A separate business account helps, but even without one, consistent categorisation and receipts are essential.

3) Claiming non-allowable expenses
Fines, most personal clothing, and personal living expenses are not business costs. Over-claiming can create problems later and doesn’t help you run a stable business.

4) Forgetting to apportion shared costs
Phone, internet, home working, and vehicles often need a business-use percentage. Guessing at year-end is risky. A small note each month is much better.

5) Poor timing awareness
Under cash basis, timing of payments affects profit. Under accruals, timing of invoices and bills matters. Knowing which method you’re using prevents errors.

6) Losing receipts and invoices
If you can’t evidence it, you can’t confidently claim it. Digital record keeping is a lifesaver—snap receipts, store PDFs, and keep invoice records consistent.

How invoice24 can make profit calculation easier (and less stressful)

Profit calculation is ultimately a record-keeping game. The more consistent your records, the easier the calculation and the more confident you’ll feel in the number. Invoice24 is designed to support that consistency without adding complexity. As a free invoice app, it can help you build a clean income trail from day one, which is the backbone of your profit figure.

Here’s how invoice24 supports better profit calculation habits:

Professional invoicing that you’ll actually use
If invoicing feels slow or awkward, people delay it—or skip it. When you can create and send invoices quickly, you’re more likely to invoice every job, which means fewer missing income items.

Clear invoice history
A reliable list of invoices issued, their dates, and statuses helps you understand how much you’ve billed and how much is outstanding. That clarity matters for both cash basis and accruals thinking.

Better payment tracking behaviour
When you can see what’s overdue, you chase sooner. Faster payments improve cashflow, which makes it easier to pay expenses on time and set money aside for tax.

Less spreadsheet chaos
Spreadsheets can work, but they often become messy over time—especially when you’re busy. Using invoice24 as the centre of your income records reduces the chance of duplication, missed invoices, or version confusion.

A stronger admin routine
The best profit calculations come from a simple monthly routine: issue invoices promptly, record expenses as you go, and do a quick check of what’s paid vs unpaid. Aunning your business like this means profit becomes a live metric rather than a once-a-year surprise.

Even if you use an accountant, invoice24 can still be the tool that keeps your day-to-day income records clean. When it’s time to calculate profit, you’re not hunting for scattered invoice PDFs or trying to remember what you charged three months ago—you have a central record you can trust.

Calculating profit through the year: a simple monthly routine

You don’t need complex accounting software to understand your profit trend. A consistent routine is often enough. Here’s a practical monthly approach many sole traders use:

1) Invoice everything
Make invoicing part of finishing the job. Issue invoices through invoice24 so every sale is recorded in one place.

2) Record expenses weekly
Set a recurring time (for example, Friday afternoon) to photograph receipts, download bills, and note what they were for. Waiting until year-end is where errors multiply.

3) Review unpaid invoices
Check what’s overdue and follow up politely. Late payments hurt cashflow and can create anxiety around tax bills.

4) Estimate tax provision
Once you have a rough profit figure to date, set aside a percentage in a separate savings pot. Even a simple approach is better than nothing.

5) Spot patterns
Are costs rising? Is one service line more profitable? Are clients paying slower? These insights help you improve profit rather than just calculate it.

This routine doesn’t have to be perfect. It just needs to happen. Profit calculation becomes dramatically easier when you remove the end-of-year scramble.

Profit vs cash: why your bank balance can be misleading

Many new sole traders look at their bank account and assume that’s their profit. It’s not. Here’s why:

• You might have cash that belongs to HMRC (tax and National Insurance due later).
• You might have received a large payment for work that required future expenses.
• You might have paid for annual expenses up front, reducing cash but not necessarily reflecting monthly performance.
• Customers might owe you money that counts as earned income under accruals, but you haven’t received it yet.

Understanding the difference between profit and cash is crucial. Profit helps you measure performance; cash helps you pay bills. You need both perspectives. The good news is that strong invoicing habits improve both. If you invoice promptly and track payments in invoice24, you reduce the risk of cash surprises while also keeping your income records tidy for profit calculation.

How to handle refunds, discounts, and bad debts

Real businesses sometimes issue refunds, offer discounts, or deal with customers who don’t pay. These situations affect profit:

Refunds
If you refund a customer, your income reduces accordingly. Keep a clear record of the original invoice and the refund or credit note.

Discounts
If you apply a discount on an invoice, your income is the discounted amount. Be consistent about how you show discounts so totals make sense.

Bad debts
If a customer never pays, the treatment depends on your accounting approach and circumstances. The key is keeping documentation: invoices, reminders, and notes of attempts to recover the debt.

Clean invoicing records are your friend here. When every job has a clear invoice history—especially if it’s issued through invoice24—it’s easier to track adjustments and ensure your profit figure reflects reality.

What profit figures are useful beyond tax

While tax profit is important, there are other profit views that help you run your business:

Gross profit
Useful if you sell products or have direct costs tied to each sale. It helps you understand margins.