Self Assessment turnover versus profit explained for sole traders

When you complete a Self Assessment tax return as a sole trader in the UK, it’s important to understand the difference between turnover and profit, as they affect what you report and how your tax is calculated.

What is turnover?

Turnover is the total amount of money you receive from your business activities before any expenses are deducted. This is also called your gross income. For example, if you sell handmade crafts and receive £10,000 in payments over the tax year, your turnover is £10,000.

What is profit?

Profit is what remains from your turnover after you deduct allowable business expenses. These expenses might include costs such as materials, business premises, or travel related to your work. If your expenses total £3,000, your profit would be £7,000 (£10,000 turnover minus £3,000 expenses).

Why does the distinction matter for Self Assessment?

• Taxable income is based on profit, not turnover. You pay Income Tax on the profit your business makes, not on the total turnover.
• Allowances and thresholds apply to turnover. For example, the trading allowance lets you earn up to £1,000 gross trading income without needing to declare it to HMRC. If your turnover is £1,000 or less, you may not have to send a tax return for that income, but you must keep records.
• If turnover exceeds £1,000, you must register for Self Assessment and declare your income, even if your profit is low or you made a loss.
• Using the trading allowance means you cannot deduct expenses separately. If your allowable expenses are more than £1,000, it may be more beneficial to claim actual expenses rather than use the allowance.

Practical example

Suppose you run a gardening service:

• Your total payments from customers during the tax year (turnover) are £900.
• Your expenses (fuel, tools, etc.) total £200.

Because your turnover is under £1,000, you may not need to report this income to HMRC, but you must keep records. However, if you have other income or circumstances requiring a tax return, you should include this income.

Now imagine your turnover is £1,500 and expenses are £600:

• You must register for Self Assessment and declare your income.
• You can choose to use the £1,000 trading allowance or deduct your £600 allowable expenses.
• If you use the trading allowance, your taxable income is £500 (£1,500 minus £1,000 allowance).
• If you claim expenses instead, your taxable income is £900 (£1,500 minus £600 expenses).
• In this case, using the trading allowance results in a lower taxable income.

Record keeping and reporting

Whether you use the trading allowance or claim expenses, you must keep accurate records of your income and costs. Turnover is always the starting point on your tax return, and profit is calculated after allowable deductions.

Remember, if you have other income sources or if HMRC requests a return, you must complete Self Assessment regardless of turnover or profit levels.

Official reference: https://www.gov.uk/self-assessment-tax-returns. Topic-specific official guidance. Always check the latest official guidance. Related forms: Browse our form category.

Important: This article provides general information. Government rules, forms and procedures can change, and this article may not reflect the latest updates. Check current GOV.UK guidance or the relevant authority before relying on it. ITG & Co. is independent and is not affiliated with a government department.