Do I pay tax on turnover or profit as a sole trader?

Profit. For 2026-27, Income Tax and Class 4 National Insurance are charged on your taxable profit, not your turnover. But the Making Tax Digital, VAT and trading allowance tests all look at turnover, before any expenses.

That is why the same year can put you under one line and over another. The rules below follow GOV.UK and HMRC's notes for the self-employment pages of the tax return, checked on 17 October 2026, for England, Wales and Northern Ireland.

Turnover and profit: the difference

Turnover is everything your business takes in before any costs. HMRC's notes for the short self-employment pages (SA103S) describe box 9, "Your turnover", as the total income received or earned by your business before taking off any expenses, including cash, card and cheque payments and tips.

Profit is what is left. GOV.UK says you deduct allowable expenses "to work out your taxable profit before paying Income Tax", and gives the example of £40,000 turnover and £10,000 of expenses, taxed on £30,000. On the tax return, taxable profit is then adjusted for things such as:

• capital allowances on vans, tools and equipment, if you use traditional accounting (on the cash basis, most equipment is simply an expense)
• losses brought forward from earlier years of the same trade, set against this year's profit

Your own drawings are not a cost. HMRC's notes say your own salary, wages and drawings are not allowable expenses.

Where turnover counts instead

Several tests ignore your costs completely:

The £50,000 line, tested on 2024-25 returns, started on 6 April 2026. Above £1,000 of gross income, you can deduct the £1,000 trading allowance instead of your actual expenses, but then you cannot claim capital allowances as well.

One old turnover test has gone. Until 2023-24 you could only join the cash basis with turnover under £150,000 and could be made to leave in some cases once it went over £300,000. From 2024-25 those limits were removed, and the cash basis became the standard method, with traditional accounting as an option you choose.

CIS subcontractors: gross, not net

If you work under the Construction Industry Scheme (CIS), your turnover is your pay before the contractor's deduction. GOV.UK tells sole traders to record "your total pay before deductions were taken" as income, and HMRC's notes ask you to check box 9 holds the full amount whenever you enter CIS deductions in box 38.

The deduction is not an expense. GOV.UK calls CIS deductions advance payments towards your tax and National Insurance bill, so they come off your bill, not off your income. Our guide on whether turnover is before or after CIS deductions has a worked example with materials.

A worked example

A plasterer in England takes £48,000 in 2026-27 and spends £9,000 on materials, van costs and other allowable expenses. They have no other income and no capital allowances or losses.

That is 17.6% of profit, or 14.3% of turnover. All of the profit sits in the basic rate band, which runs to £50,270, so none is taxed at 40% and no Class 4 is due at 2%. If tax were charged on the full £48,000, the bill would be £9,211.80, which is £2,340 more: each £1 of allowable expense saves 26p here.

Now the turnover tests. £48,000 is well under £90,000, so with steady takings no VAT registration is needed and they can usually use the short pages. But if their 2025-26 turnover was over £30,000, MTD starts on 6 April 2027, whatever their profit. This is an example only.

What this means for you

Keep two numbers in view. For your tax bill, profit is what matters, so recording every allowable cost lowers it. For MTD and VAT, turnover is what HMRC tests, and no amount of costs will take you back under the line. In our reading, the turnover figure is the one tradespeople most often underestimate, especially when CIS or materials are involved.

Steps to work out where you stand

1. Add up your turnover for the tax year: every payment, before costs and before CIS deductions.
2. Add any rental income, then compare the total with £30,000 for 2025-26, or £20,000 for 2026-27, to see when MTD starts. The free MTD check does this for you.
3. Keep a running 12-month total of your sales against the £90,000 VAT threshold.
4. Take off your allowable expenses, then capital allowances and any losses brought forward, to get taxable profit.
5. Work out Income Tax and Class 4 on that profit, and set the money aside.

Our guide on how much to set aside for tax has a table by profit, and the trades section has more guides.