Profit is how much money you’re left with after you’ve subtracted costs from your earnings.
When can you talk about “making a profit”:
- if you’re self-employed
- if you’re a landlord earning rental income
- or if you’re someone who just sold property or other assets (like shares in a company)
- but not when you’re only a full-time employee with no other earnings.
Knowing your profit is important because that is what HMRC will tax you on.
How to calculate your profit:
- if you’re self-employed, you pay tax on whatever you’re left with after you deduct your self-employed expenses or the £1,000 Trading Allowance
- same for landlords
- when you sell property, shares, or other assets, you only pay tax on the difference between the selling price and the original purchase price, minus the Capital Gains Tax Allowance (£12,500 in 2019/2020).
If your costs are higher than your earnings, you’ve made a loss. That’s not great, but sometimes you can use it to offset a profit next year and pay less tax then.