Margin Calculator
Enter any two values above to calculate the rest.
What Is Gross Margin?
Gross margin is the percentage of revenue left after subtracting the direct cost of goods sold (COGS). It tells you how efficiently your business turns sales into profit before fixed costs, salaries, and overheads are accounted for.
Formula: Gross Margin % = (Revenue − Cost) ÷ Revenue × 100
Example: A UK retailer buys a product for £60 and sells it for £100. Gross margin = (£100 − £60) ÷ £100 × 100 = 40%. That means 40p of every £1 of revenue is available to cover overheads and generate profit.
Gross Margin and VAT — A Critical UK Distinction
Most UK businesses registered for VAT charge 20% VAT on top of their selling price. If you quote a VAT-inclusive price to consumers, your actual revenue is the ex-VAT figure — the VAT element belongs to HMRC, not you. Calculating margin on the VAT-inclusive price significantly overstates your profitability.
Example: You sell a product for £120 incl. VAT. Ex-VAT price = £100. Your cost is £60. Correct gross margin = (£100 − £60) ÷ £100 × 100 = 40%. If you mistakenly calculate on £120: (£120 − £60) ÷ £120 = 50% — a dangerous overstatement.
Enable the VAT toggle in the calculator above to strip VAT automatically before calculating your margin.
Gross Margin vs Markup — The Most Common Confusion
Markup and gross margin both measure profitability, but they use a different base. Markup uses cost as the denominator; gross margin uses revenue. This means the same profit produces a higher markup percentage than gross margin percentage.
| Metric | Formula | Example (cost £60, sell £100) |
|---|---|---|
| Gross Margin | (Revenue − Cost) ÷ Revenue | 40% |
| Markup | (Revenue − Cost) ÷ Cost | 66.7% |
UK accountants and management accounts typically report gross margin. Buyers and merchandisers often think in markup. Mixing them up is one of the most common pricing errors in small businesses — a 50% markup is only a 33.3% gross margin.
Net Margin
Net margin deducts all costs — overheads, salaries, rent, depreciation, interest, and tax — not just COGS. It is the bottom-line profitability measure used in statutory accounts and by investors.
Formula: Net Margin % = Net Profit ÷ Revenue × 100
UK SME net margins vary widely by sector: grocery retail 1–3%, professional services 15–25%, software 20–35%. HMRC uses net profit figures for Corporation Tax, currently 25% for profits above £250,000 (19% for small profits under £50,000).
Operating Margin
Operating margin (also called EBIT margin) measures profit before interest and tax. It is useful for comparing operational efficiency across companies with different capital structures or tax positions.
Formula: Operating Margin % = EBIT ÷ Revenue × 100
Operating margin appears prominently in management accounts, investor reports, and bank covenant tests for UK businesses.
UK Industry Gross Margin Benchmarks
| Sector | Typical Gross Margin |
|---|---|
| Food retail / supermarkets | 20–30% |
| Fashion retail | 50–65% |
| Restaurants / hospitality | 60–75% |
| Software / SaaS | 70–85% |
| Professional services | 50–70% |
| Manufacturing | 25–45% |
| Construction | 15–25% |
Step-by-Step: Pricing a Product with a Target Margin
- Determine your cost price — e.g. £45 per unit landed (includes import duty and shipping).
- Decide your target gross margin — e.g. 55%.
- Calculate selling price: £45 ÷ (1 − 0.55) = £100 ex-VAT.
- Add 20% VAT for the consumer price: £100 × 1.20 = £120 incl. VAT.
- Confirm: gross margin on ex-VAT price = (£100 − £45) ÷ £100 = 55% ✓
Frequently Asked Questions
What is a good gross margin for a UK small business?
There is no universal answer — it depends heavily on sector. A 20% gross margin is healthy in grocery retail but dangerously thin in professional services. As a general rule, your gross margin must be high enough to cover all your fixed overheads and still leave a net profit. Use the industry benchmarks above as a starting point.
How do I calculate gross margin in Excel?
Enter revenue in A1 and cost in B1. In C1, enter =(A1-B1)/A1 and format as a percentage. For VAT-inclusive revenue, first strip VAT: =A1/1.2 (for 20% VAT), then calculate margin on that figure.
What is the difference between gross profit and gross margin?
Gross profit is an absolute £ figure (Revenue − Cost). Gross margin is the same figure expressed as a percentage of revenue. Both measure the same thing but gross margin is more useful for comparison across periods or against competitors of different sizes.
Should I calculate margin on the VAT-inclusive or ex-VAT price?
Always on the ex-VAT price. VAT collected belongs to HMRC — it is not your income. Using the VAT-inclusive price inflates your apparent margin and leads to under-pricing.
What is a 50% markup in gross margin terms?
A 50% markup means profit = 50% of cost. Gross margin = Profit ÷ Revenue = 50 ÷ 150 = 33.3%. Use the calculator above to convert between markup and margin instantly.
How does margin relate to UK Corporation Tax?
Corporation Tax is levied on net profit, not gross margin. However, a healthy gross margin is the foundation — if your gross margin is too thin to cover overheads, you will make a net loss and there will be no tax to pay, but also no viable business.
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