How to calculate net profit

Published Thursday 23 July 2026

Table of contents

• What is net profit?
• The net profit formula
• How to calculate net profit
• What's included in net profit
• Gross profit vs operating profit vs net profit
• Net profit margin and what's a good margin
• Do you pay tax on gross or net profit?
• How to improve your net profit
• Keep more of what your business earns with Xero
• FAQs on net profit

Key takeaways

• Net profit is what's left after you subtract every cost from your total income, so it shows the true bottom line of your business.
• The net profit formula is total revenue minus total expenses, which you can also work out as gross profit minus operating expenses and taxes.
• Net profit margin turns that figure into a percentage of revenue, giving you a quick way to compare profitability over time and against your industry.
• In the UK you're taxed on your profit rather than your total sales, and Making Tax Digital for Income Tax is changing how many small businesses report it.

What is net profit?

Before you can grow profitability, you need to know exactly how much your business keeps once the bills are paid. That figure is your net profit.

Net profit is your gross profit minus your operating expenses and taxes. Put another way, it's your total income minus all your expenses, and it's the bottom line that tells you whether your business made money over a given period.

You'll often see it as the final line on a profit and loss statement, which is why people call it the bottom line.

The net profit formula

The net profit formula is straightforward once you know which numbers to gather. Net profit = total revenue − total expenses, which you can also express as gross profit − operating expenses − taxes.

Here's what each part of the formula covers:

• Total revenue: all the money your business brings in from sales before any costs come out
• Total expenses: everything you spend to run the business, including direct costs, overheads, interest and tax
• Gross profit: your revenue minus the direct cost of making or delivering what you sell
• Operating expenses: the running costs that aren't tied directly to production, such as rent, salaries and marketing
• Taxes: the amount owed on your taxable profit for the period

How to calculate net profit

Working out net profit is a case of gathering your figures and subtracting them in order. Follow these steps to get to your bottom line.

1. Add up your total revenue for the period.
2. Subtract the direct cost of your goods or services to find your gross profit.
3. Subtract your operating expenses, such as rent, wages and utilities.
4. Subtract any interest and taxes owed.
5. The figure that remains is your net profit.

A worked example makes it clearer. Say your business sells £20,000 of products over the period, and it cost £8,000 to make them. That leaves you with a gross profit of £12,000.

From that gross profit, you subtract £3,000 of operating expenses and £4,000 of taxes. Your net profit is £5,000, the amount your business actually keeps once every cost is accounted for.

What's included in net profit

Net profit reflects every cost your business carries, beyond the obvious ones. Knowing what feeds into the calculation helps you find where money is leaking.

• Cost of sales: the direct cost of producing or buying what you sell
• Operating expenses: day-to-day running costs like rent, wages and software
• Interest: what you pay on loans, overdrafts and other borrowing
• Tax: the amount due on your taxable profit
• Depreciation and amortisation: the falling value of assets like equipment and intangible items over time

Gross profit vs operating profit vs net profit

Profit shows up at three levels on your accounts, and each one tells you something different. Reading them together gives you a fuller picture of how your business performs.

Gross profit is your revenue minus the direct cost of what you sell, so it shows how profitable your core products or services are before overheads.

Operating profit takes gross profit and subtracts your operating expenses, such as rent and salaries. It shows how well the business runs day to day, before interest and tax.

Net profit is the final figure, arrived at after interest and tax come out too. If you want a side-by-side breakdown, this guide to gross profit vs net profit walks through the difference in detail.

Net profit margin and what's a good margin

Net profit margin turns your net profit into a percentage of revenue, so you can compare performance over time regardless of size. It's one of the clearest measures of how efficiently your business turns sales into profit.

The formula is net profit ÷ total revenue × 100. So if your net profit is £5,000 on £20,000 of revenue, your net profit margin is 25%.

What counts as a "good" margin varies widely by industry, since a busy café and a software firm carry very different costs. You can work out your figure quickly with this net profit margin calculator, then compare it against typical margins for your sector.

Do you pay tax on gross or net profit?

A common question for UK small business owners is which profit figure the tax bill is based on. The short answer is profit, not your total sales.

UK businesses are taxed on their profit, which is broadly your income minus allowable business expenses. That taxable profit is closer to your net profit than to your gross profit or revenue, so keeping accurate records of your costs matters.

How you report that profit is also changing. Making Tax Digital for Income Tax is bringing in digital record keeping and more frequent updates for many sole traders and landlords, so it's worth understanding how the rules apply to your circumstances.

How to improve your net profit

Improving net profit comes down to earning more or spending less, and usually a mix of both. A few practical levers tend to make the biggest difference.

• Review your pricing to make sure it reflects the value you deliver
• Cut overheads by trimming subscriptions, renegotiating contracts and reducing waste
• Control direct costs by shopping around suppliers and reducing production losses
• Drop or rework product lines that consistently lose money

Watching costs closely counts because outside pressures can squeeze your margins fast. According to Xero Small Business Insights, UK petrol prices rose 15% in the March quarter of 2026, adding to the running costs many small businesses carry.

It also helps to keep an eye on the gap between profit and the cash in your account, since the two aren't the same. This guide on cash flow vs profit explains why a profitable business can still run short of cash.

Keep more of what your business earns with Xero

Tracking net profit is far easier when your income and expenses sit in one place with clear reports. With accounting software that keeps your numbers up to date, you can watch your margins in real time and make confident decisions about pricing and costs.

Bring your finances together so you always know your bottom line. Get one month free.

FAQs on net profit

Here are answers to some frequently asked questions about net profit to help you put the figures to work.

What is the difference between gross and net profit?

Gross profit is your revenue minus the direct cost of what you sell. Net profit goes further and takes out operating expenses, interest and tax as well.

What is operating profit?

Operating profit is gross profit minus your operating expenses, such as rent and wages. It sits between gross profit and net profit because it comes before interest and tax.

Can net profit be negative?

Yes, if your total expenses are higher than your total revenue you'll make a net loss. This can flag pricing, cost or demand issues that need attention.

Is net profit the same as net income?

They usually mean the same thing: the money left after all costs are paid. Net income is the more common term in some regions, but the calculation is identical.

What is a good net profit margin?

There's no single benchmark, as a good margin depends heavily on your industry and business model. Comparing your margin against similar businesses in your sector gives you a more useful gauge.