How do I work out my taxable profits?

How do I work out my taxable profits?

Taxable profits are usually based on the profits shown by your business accounts after they have been adjusted to comply with the tax rules. We explain how to prepare business accounts and how to make adjustments for tax purposes later on this page.

However, there are two situations where these calculations may not be necessary and this is due to the introduction of the trading allowance. The situations are:

(a) if the total income in your basis period for the tax year is not more than the trading allowance (£1,000) and you decide to use the allowance then there is no taxable profit for the business in that tax year, or

(b) if you decide to claim a round sum amount equal to the trading allowance (£1,000) for your business expenses instead of the actual business expenses you have incurred in your basis period for the tax year, then the taxable profit is simply the excess of the total trading income over the trading allowance in that tax year.

However, you cannot create a loss if your trading income is less than the trading allowance.

This is explained in more detail on our What is the trading allowance? page.

What is my total income?

Your total income, which is also known as your gross income, is all your business income in the accounting period. This is also called turnover or sales. This information should form part of your day-to-day business records and so should be fairly easy to calculate. Many small businesses or hobby traders will record their income and expenses on a cash basis and so for many people, the gross income will be the amount of sales income received in the accounting period.

If you are a self-employed construction worker then you may have CIS (Construction Industry Scheme) deductions taken from your income before you are paid, so you need to be careful when working out your gross income. There is more information on our page What is the Construction Industry Scheme (CIS)? 

What is my basis period?

This is the period for which you will be charged tax in a particular tax year. The tax year is a 12 month period which runs from 6 April to the following 5 April. For example the 2023/24 tax year runs from 6 April 2023 to 5 April 2024.

Usually, for a continuing business your basis period is the 12 month accounting period that ends within that tax year. But the rules regarding basis periods are changing from the 2023/24 tax year. These changes will affect you if you do not have an accounting period ending between 31 March and 5 April. 

Normally accounts are prepared to the same date in each year (the accounting date), so you usually choose a date that is convenient for you. You can have any day in the year as your accounting date although from a tax point of view, the easiest date to choose is 5 April, but any date from 31 March to 5 April inclusive will be treated as 5 April to make things as easy for you as possible. 

So if you make up your accounts to, say 31 March each year, this is your accounting date and the 12 months to 31 March is your accounting period.

⚠️ If you do not have an accounting period ending between 31 March and 5 April the changes to the basis period rules (known as basis period reform) will affect you and how much tax you pay. For detailed information and guidance on the new rules see our webpage: Basis period reform

The changes to the basis period rules mean your tax affairs are likely to be simpler in future if you prepare your business accounts to 31 March or 5 April. However, you can still choose a different accounting date if you want to, but it will make preparing your tax return from the 2024/25 tax year onwards more complicated. For more details see our webpage basis period reform

Example

Trevor makes up accounts to 31 October each year. His basis period for 2022/23 is the year ended 31 October 2022. This means that the tax Trevor pays for the 2022/23 tax year is the tax on his taxable profits for the basis period 1 November 2021 – 31 October 2022. Please note that as Trevor does not have a basis period ending 31 March to 5 April, he will be affected by the new basis period rules when he prepares his tax return for the 2023/24 tax year onwards.

How do I know my basis periods when I first start self-employment?

For the first tax year, your basis period is always the period from the date you started trading until the following 5 April. This will remain the same under the new basis period reform rules.

Remember that if your accounting date falls between 31 March and 5 April inclusive, this will be treated as 5 April for these purposes.

Example

Gunther starts trading on 1 July 2023. His basis period for the 2023/24 tax year is the period from 1 July 2023 to 5 April 2024.

How do I work out my basis periods after that?

⚠️The rules regarding basis periods are changing from the 2023/24 tax year. This is known as basis period reform. The new rules will affect you if you do not have an accounting period ending between 31 March and 5 April. If the changes apply to you it will affect how much tax you pay. For detailed information and guidance on the new rules see our webpage: ​basis period reform.

The information below explains the position before basis period reform (so before 2023/24).

Tax years up to and including 2022/23

For the second tax year that you are self-employed you may fall into one of three different categories:

1. If you have prepared a set of accounts for at least 12 months that end in that second tax year, then the basis period for that tax year is the 12 months ending on the accounting date.

Under the new basis period rules, if your accounting date is going to be 5 April each year then the accounting period will align with the basis period.

2. You may have no accounts that actually end in the tax year: if that is the case, the basis period is from 6 April to the following 5 April.

3. You may prepare a set of accounts that end in the tax year, but they are less than 12 months long. In that case, the basis period is your first 12 months of trading.

Example

Louis starts trading on 1 January 2021 and draws up his first set of accounts for a six-month period to 30 June 2021 and to the same date each year after that (but see our page on the new basis period reform rules).

The basis period for his first year (2020/21) is the period from 1 January 2021 to 5 April 2021.The basis period for his second year (2021/22) is from 1 January 2021 to 31 December 2021. The basis period for his third year (2022/23) is the year to 30 June 2022.

You will notice that in the examples above some of the profits may be taxed twice in different tax years, we explain how this works in the section I seem to be taxed twice on some profits. Is that right? In short, the profits that are taxed twice in the opening years of self-employment are called overlap profits. Before the 2023/24 tax year these overlap profits would usually be deducted when you ceased trading in the future or if you changed your accounting period. This is known as overlap relief. Under the new basis period reform rules all overlap relief will be given in the 2023/24 tax year- see our webpage for more information.

⚠️ The rules regarding basis periods are changing from the 2023/24 tax year. We will update our guidance to explain the new rules and how this will affect you if you don’t have a basis period ending between 31 March and 5 April.

What is my basis period in my last year of trading?

If your trading ceases before 6 April 2023 then the final basis period starts immediately after the previous period ends and stops on your final day of trading.

Example

Yasmine has traded for many years making accounts up to 31 October. Yasmine ceases trading on 31 August 2022, which is in the 2022/23 tax year.

Yasmine’s accounts for the year to 31 October 2021 would form her basis period for the tax year 2021/22. Yasmine’s final tax year of trading is 2022/23 and her basis period is the period from 1 November 2021 to 31 August 2022.

Yasmine would be able to deduct any overlap relief that was still being carried forward when she ceased trading.

Please note the rules for using overlap relief are changing from the 2023/24 tax year under the new basis period reform rules. See our webpage basis period reform for more details including guidance if you cease trading during the 2023/24 tax year.

How do I prepare accounts?

You need to prepare accounts so you can work out what profits or losses you have made from your self-employment. You do this from your business records. Your accounts should show all of the income and expenses from your business for the period of the accounts. After that you can decide whether the expenses are allowable for tax purposes or not.

Sometimes accounts are prepared on an accruals basis, or you may be able to prepare them on a cash basis.

What is the accruals basis?

Historically, this was the usual way that accounts were prepared in the UK. In general terms this means that all income earned and all expenses incurred during the accounting period are included in the accounts, whether they are paid or not.

For example, if you invoice a customer on 31 December 2022 and draw up accounts to 31 December 2022, this invoice would be included, whether the customer had paid it or not.

Similarly, if you paid your annual insurance bill on 1 July 2022 to cover the period from 1 July 2022 to 30 June 2023, you would only include half of the cost in the accounts to 31 December 2022 even though you had paid the full amount; the other half would be included in the accounts for the following year as a prepayment.

There is more information on the accruals basis including how to move from the accruals basis to the cash basis and vice versa on our How do I prepare my accounts? page.

What is the cash basis?

Whereas the accruals basis looks at income earned and expenses incurred, the cash basis looks at income actually received and expenses actually paid in the accounting period.

If you meet certain criteria, you can choose to use the cash basis instead of the accruals basis.

You can read more about this on our page How do I prepare my accounts?

What should my accounts look like?

Below is an example of what a typical profit and loss account may look like, but if your accounts look slightly different to this that is fine as long as you have included all the income (sales) less any business expenses (costs) so you can calculate your business profit.

ABC Services
Profit and loss account for the year ended 5 April 2023
Tax year 2022/23

	£	£
Sales (turnover or income)		15,000
Less cost of sales:
Product purchases/materials		(1,750)
Gross profit		13,250
Less other expenses:
Marketing	650
Rent	4,000
Travel – mileage	400
Working at home	120
Sundry	75
Capital equipment	1,500
		6,745
Net profit		6,505

It is possible that you make a loss and not a profit, and this happens if your sales income is less than your expenses. We cover losses on our webpage What if I make a loss?

Once you have arrived at your net profit, you then need to identify which of your business expenses are not allowable for tax purposes. This is because you may incur expenses that reduce your profit in your accounts but which HM Revenue & Customs (HMRC) do not allow you to deduct for tax purposes. You must therefore add them back in so that you pay tax on them (see below).

I have prepared my accounts and identified which expenses are not allowable. What's next?

You take the profit per your accounts (£6,505 in the above example) and add to it any business expenses that are not allowable for tax purposes.

Example

Bernard’s accounts for the year to 31 March 2023 show a profit of £17,300. The accounts include all of his motoring expenses of £12,000, but Bernard estimates that only 60% of these costs are actually business costs so an adjustment is needed to ‘add back’ the personal motoring expenses (40%).

Profit per accounts	£17,300
Add: personal motoring expenses	£4,800 (40% of £12,000)
Adjusted taxable profits for the 2022/23 tax year	£22,100

How do I get relief for capital allowances?

Some expenditure will be treated as capital expenditure rather than as a revenue or trading expense. An item will generally be a capital expense rather than a revenue expense if it is an item you need for your business and it is likely to have an enduring benefit. There are some exceptions to this.

If you are using the accruals basis you cannot deduct capital expenditure from your trading profits. Instead you may be able to claim capital allowances for that expenditure. You can’t usually claim capital allowances if you are using the cash basis. We have detailed information on calculating capital allowances on our page What capital allowances can I claim?

Once calculated, capital allowances are treated as a trading expense and are deducted from the adjusted profits as illustrated in the example below. You should note that a deduction of capital allowances may create a loss for tax purposes or increase a loss.

Example

Continuing the example of Bernard from above: Bernard bought a new machine in January 2023 for £2,500 and prepares his accounts using the accruals basis. The machine will qualify for 100% capital allowances (annual investment allowance).

Bernard’s taxable profits for the 2022/23 tax year become:

Adjusted profits (from above)	£22,100
Less: capital allowances	£2,500
Taxable profits	£19,600

 

Once you have calculated the taxable profits in this way you will need to work out which tax year the profits will be taxed in by following the basis period rules explained above. Please note that from the 2023/24 tax year onwards the new basis period reform rules will affect businesses which do not have an accounting period which ends between 31 March to 5 April.

I have more than one business (multiple trades). How should I prepare my accounts?

Some people have more than one business, (sometimes called multiple trades), for example they may run a dog-walking business and be a self-employed courier. There are several extra points to consider if you operate multiple trades, these include:

• Preparing accounts
• Trading allowance
• Losses
• How your tax and National Insurance contributions (NIC) are calculated

We will consider these points, in turn, below.

Preparing accounts

Each trade must be considered separately when preparing your accounts for your Self Assessment tax return. You must not add together the income and expenses from your different businesses to produce just one set of business records and accounts because on your tax return each trade must be shown separately.

Example

India is self-employed but running two different businesses, as a leaflet distributor and walking and feeding pets. For the 2022/23 tax year India will need to prepare accounts for her two different businesses. She goes through her bank statements and business records and allocates her business income and expenses between her two separate trades, and prepares two different profit and loss accounts as follows:

	Leaflet distribution £	Pet care £
Sales	2,400	3,500
Less total allowable business expenses	(650)	(475)
Taxable profits	1,750	3,025

So even though in total, India earned taxable profits of £4,775, she will need to calculate the profits for each trade to show these as two separate self-employed businesses on her tax return (see How your tax and National Insurance contributions (NIC) are calculated below).

Trading Allowance

The trading allowance allows you to deduct up to £1,000 from your trading and miscellaneous income instead of your business expenses. It is explained in more detail on our page, What is the trading allowance?.

If you have multiple trades then you can only use the trading allowance once. So the maximum you can claim in total across all your businesses is £1,000 but you can decide where to allocate it, if it is beneficial to use it. This is illustrated in the example Jay on our page, What is the trading allowance?.

Losses

If you make a loss in one or more of your trades you will need to consider how a loss in one trade interacts with your other income, including profits made in your other trades.

Our page What if I make a loss? explains what you can do with trading losses. It also explains which loss reliefs you can use as this depends on factors such as whether you use the cash basis or the accruals basis when preparing your accounts. 

Example

Owen runs a car washing business and sells ice creams in the summer months. Owen uses the accruals basis method to prepare his accounts. He bought a new ice cream van in the summer because his old one broke down and this resulted in higher expenses than usual for that business. In the 2022/23 tax year Owen’s accounts show the following:

	Car washing £	Ice cream £
Sales	16,300	1,500
Less total allowable business expenses	(1,450)	(2,500)
Taxable profits / (loss)	14,850	(1,000)

When Owen prepares his tax return he will need to complete a separate self-employment section for each of his two businesses, one for the car washing business showing profits of £14,850 and one for the ice cream business showing a loss of £1,000. He must then decide how he uses his losses, the choices Owen has are explained in our table on loss reliefs. If Owen decides to use his losses against his total income for the 2022/23 tax year this will reduce his taxable profits from his car washing business to £13,850 (£14,850 less £1,000).

If Owen decides that he wants to carry forward his loss of £1,000, he can only offset this loss against future profits from his ice cream business and not against any profits from his car washing business.

How your tax and National Insurance contributions (NIC) are calculated

On your tax return you must record how many different self-employment businesses you have, their trading names, description of the businesses and their respective accounting dates. If you have multiple trades it would be easiest if you use the same accounting date wherever possible. Please note that from the 2023/24 tax year onwards there are new basis period reform rules which may impact the accounting period you decide to use for your multiple trades.

You then need to provide details of the income, business expenses and any adjustments to profit for each individual trade.

However, your income tax and NICs will be calculated on the combined total of your profits from all self-employments.

Example

If Erin runs three multiple trades and in the 2022/23 tax year makes taxable profits of £3,800, £12,000 and £5,500 respectively then, assuming she has no other taxable income, her tax and NIC would be calculated based on total profits of £21,300 (£3,800+ £12,000 + £5,500).

	£
Profits from self-employment	21,300
Less personal allowance	(12,570)
Taxable income	8,730
Tax at 20%	1,746.00
National Insurance contributions (NIC)
Class 2: £3.15 for 52 weeks	163.80
Class 4: (£21,300- £11,908) at 9%	845.28
Total tax and NIC	2,755.08

As you can see from the example above Erin’s income tax and Class 4 NIC are calculated using the total of all three profits from her self-employed businesses.

I seem to be taxed twice on some profits. Is that right?

The tax system operates so that overall all business profits are only taxed once but, as you can see from the examples above, sometimes at the start of a business profits are taxed more than once. These profits that are taxed twice are called overlap profits.

Before the new basis period reform rules which start from the 2023/24 tax year you could also have overlap profits when changing your accounting date.

Example

Consider the Louis example above.

• In year one (2020/21) he is taxed on the profits in the period from 1 January 2021 to 5 April 2021.
• In year two (2021/22) he is taxed on the profits in the period from 1 January 2021 to 31 December 2021.
• In year three (2022/23) he is taxed on the profits in the period from 1 July 2021 to 30 June 2022.

You will see that in year two he is taxed on the profits in the period from 1 January 2021 to 5 April 2021 that were already taxed in year one.

In year three he is taxed on the profits in the period from 1 July 2021 to 31 December 2021 that were already taxed in year two.

If we assume that Louis’s taxable profits for the six-month period to 30 June 2021 were £6,000 and his profits for the year to 30 June 2022 were £18,000, then his taxable profits and overlap profits would be as follows:

Tax year	Taxable profits	Overlap profits
2020/21	£3,000 (three months)	nil
2021/22	£15,000 (12 months being six months to 30 June 2021 plus six months to 31 December 2021 so £6,000 + £9,000)	£3,000 (3 months to 5 April 2021)
2022/23	£18,000 (12 months to 30 June 2022)	£9,000 (6 months)

Total overlap profits are £12,000.

As you should only be taxed once on income, you can use these overlap profits to reduce future taxable income as explained below. If you have not used your overlap profits before the 2023/24 tax year then you MUST use them in the 2023/24 tax year or lose the available overlap relief. See our Basis period reform page for more information. 

When can I use overlap profits?

Before the 2023/24 tax year you can usually use overlap profits either when you cease to trade or if you change your accounting date to a date closer to the end of the tax year, that is 5 April. This is called overlap relief. See below for an explanation of how each of these works.

However, as the rules regarding basis periods are changing from the 2023/24 tax year you will be able to use your overlap profits during the 2023/24 tax year. If you do not use overlap relief within the 2023/24 tax year then you will lose it - see our further guidance for more information. 

You will need to keep a note of the amount of any overlap profit you have had. You carry your overlap profit forward on your tax return (for paper tax returns use the self-employment full pages (SA103F) until you are able to use it (which must be in the 2023/24 tax year at the latest otherwise you will lose it).

Can I change my accounting date?

It is possible to change your accounting date for tax purposes but you will need to explain to HMRC in your tax return why the change is necessary.

If your explanation is reasonable it is likely to be accepted. For example, you have two businesses and you want the same accounting date for each. If HMRC do not accept your explanation you will have to keep your existing date.

You cannot just keep changing the date each year because it is convenient to do so.

If you want the change to be temporary – you can ignore it for tax purposes. Otherwise you will be treated as having changed your accounting date if any of the circumstances described below apply:

• You have made up accounts to a date different from that used for your tax in the previous year
• You intend to draw up a set of accounts for more than 12 months so that no accounting date falls into the current tax year
• If you changed your accounting date last year but this was not accepted by HMRC and you are using the same date again

Before the 2023/24 tax year onwards changing your accounting date meant that you would have a new basis period for your taxable profits. See the section below for how this was calculated.

The 2023/24 tax year is a transitional year for the new basis period reform rules. Our detailed guidance explains why you may want to change your accounting period during the 2023/24 tax year to end on a date such as 31 March or 5 April 2024.

What happens to my basis period if I change my accounting date?

⚠️The rules regarding basis periods are changing from 2023/24 tax year and you will be treated as having a ‘tax year’ basis period, this means a basis period from 6 April to following 5 April. If you have an accounting period ending on any dates between 31 March and 4 April this will be treated as if it is an accounting period ending on 5 April. See our Basis period reform page for more information.

The following guidance relates to before the 2023/24 tax year. 

If you change your accounting date you will need to work out your new basis period using the following rules:

1. If your new accounting date in 2022/23 is more than 12 months after the end of your basis period for the previous year (2021/22), your new basis period will be from the end of that basis period to your new accounting date.

2. If you have changed accounting date and your basis period is more than 12 months, you can use your overlap profits to reduce the basis period to 12 months – see the example below.

Example

Susan has a basis period in 2021/22 that ended on 31 December 2021. She decides her new accounting date will be31 March 2023. Her basis period for 2022/23 is the 15 months from 1 January 2022 to 31 March 2023. If Susan has carried forward any overlap profits, then at this time she can use overlap relief equivalent to three months of profits to reduce the tax she has to pay for the 2022/23 tax year. If she was carrying forward overlap profits of £4,000 that equated to four months profits, then she would use overlap profits of £3,000 now and still carry forward £1,000 to use in the 2023/24 tax tear (under the new basis period reform rules).

Susan's accounting date in the future will be 31 March and so her basis period for the 2022/23 tax year will then be the accounting year to 31 March 2023. Under the new basis period reform rules, Susan’s basis period for the 2023/24 tax year onwards will follow the tax year (so ending 5 April 2024) but she can still continue to use a 31 March accounting date as this will be treated as if it is 5 April for her tax return.

3. If your accounting date in 2022/23 is less than 12 months after the end of your basis period for the previous year to 2021/22 your new basis period will be 12 months ending on the new accounting date.

Example

Tom has a basis period for 2021/22 that ended on 30 September 2021. His new accounting date is 30 June 2022. His basis period for 2022/23 will be the 12 months to 30 June 2022. 

He is creating a further three months of overlap profits that will be carried forward but must be used up in the 2023/24 tax year or will be lost under the new basis period reform rules.

Tom’s accounting date in future will be 30 June and so his basis period for the 2022/23 tax year will then be the accounting year to 30 June 2022. However, under the new basis period reform rules, Tom’s basis period for the 2023/24 tax year onwards will follow the tax year (so ending 5 April 2024) but he can still continue to use a 30 June accounting date if he does not want to change it again. 

If you have changed accounting date and your basis period is more than 12 months, you can use your overlap profits to reduce the basis period to 12 months – see the example of Susan (above) However, remember that all overlap profits must be used at the latest in the 2023/34 tax year otherwise it will be lost- see our page, Basis period reform for more information.

If you wish to find more information on changing your accounting date, see the guidance contained in the HS222 How to calculate your taxable profits factsheet.

How do I get relief for overlap profits when I cease trading?

Any previously unrelieved overlap profits are deducted from your profits either in the last tax year (if this is before the 2023/24 tax year) or in the 2023/24 tax year (see our guidance on the new basis period reform rules for more information).

Example

Max is carrying forward overlap profits of £12,000. He makes up his last set of accounts for the year to 30 June 2022 that show a profit of £28,000.

Max ceased trading on 30 June 2022, that is in the tax year 2022/23. If he had not ceased trading he would have been assessed to tax on profits of £28,000. But he can deduct his overlap profits from his taxable profits for the year to 30 June 2022 because he has stopped trading. His assessable profits for 2022/23 become £16,000 (£28,000 less overlap profits of £12,000).

Where can I find more information on preparing my accounts for my tax return?

Our guide to self-employment is intended to supplement the material in this section. We wrote this guide to help advisers (non-tax) who advise low-income self-employed individuals and also for self-employed people who want more detailed information in one accessible place. The guide explains the less common tax rules and contains more detailed information including examples of accounts prepared using the accruals basis and the cash basis and also a case study showing how to prepare accounts and what to include on your 2022/23 tax return using the cash basis.

Our Basis period reform page explains about the new rules which are starting from the 2023/24 tax year and could affect you if you have any unused overlap relief and/or have an accounting date which does not end on any dates between 31 March to 5 April inclusive.

Our getting help page details where you can find help with completing your tax return from HMRC and other charities and non-governmental organisations.