How to Calculate Sole Trader Profit in 2026/27

Since April 2024, every sole trader in the UK has been using a different default method of calculating profit than they were three years earlier, whether they've noticed it or not. The old turnover limits that used to restrict who could use the simpler "cash basis" method have gone entirely. Unless you've actively chosen otherwise, HMRC now assumes you're using it, regardless of how large your business has grown. It's a genuinely significant shift, and we still meet business owners across Kent who have no idea it happened.

"How do I actually calculate my profit?" sounds like it should have a simple, single answer. It doesn't, not quite, because the method you use to get there genuinely affects the final figure, sometimes by a meaningful amount. We're a two-partner practice based in Folkestone, working with sole traders across Dover, Canterbury, Ashford, and Deal, and this is the properly detailed explanation we wish every new client had before their first tax return, not after.

Profit Is Not Turnover: A Quick, Necessary Reminder

Before anything else, a foundational point worth restating clearly. Your profit, the figure your tax bill is actually based on, is your income minus your genuine, allowable business expenses. It is never simply the total amount your business brought in. A business turning over £70,000 with £30,000 of legitimate costs has a taxable profit of £40,000, not £70,000. Every calculation in this article starts from that principle.

The Foundational Choice: Cash Basis or Accruals Basis

Here's the detail that genuinely determines how your profit figure is built, and it's the part most business owners have never had properly explained to them. There are two different methods for recognising income and expenses in your accounts: the cash basis and the accruals basis, sometimes called traditional accounting.

Under the cash basis, you record income when you actually receive the money, and expenses when you actually pay them. If a client owes you £2,000 that hasn't landed in your bank account yet, it simply isn't counted as income for this tax year. If you've been billed for something but haven't paid it yet, it isn't counted as an expense yet either.

Under the accruals basis, income is recorded when it's earned, typically when you issue an invoice, regardless of whether it's actually been paid, and expenses are recorded when they're incurred, regardless of when you actually settle them. This method requires tracking debtors, money owed to you, and creditors, money you owe, alongside your straightforward cash transactions.

Since 6 April 2024, the cash basis has been the default method for the vast majority of sole traders and eligible partnerships, with no turnover threshold restricting who can use it. If you'd rather use accruals accounting instead, perhaps because it suits your business better, you need to actively elect to do so through your Self Assessment return. Until that change, most growing businesses were eventually forced onto accruals accounting once their turnover crossed £150,000. That restriction is now gone entirely.

Why This Choice Genuinely Matters

This isn't just a technical formality; it can produce a genuinely different profit figure for the same underlying business activity in a given year, purely because of timing. Let's make this concrete with a full worked example.

Imagine a marketing consultant working from home near Deal. Over the 2026/27 tax year, she raises invoices totalling £52,000. By 5 April 2027, she's actually been paid £46,000 of that, with £6,000 still outstanding from clients who haven't yet settled their invoices. She also received £4,000 during this tax year relating to invoices she'd raised the previous year. On the expenses side, she's paid out £9,500 in general running costs during the year, £600 of which actually relates to a service she received back in March 2026, billed and paid just after the new tax year began. She also bought a new laptop for £1,200 during the year.

Under the cash basis, her income for the year is the money she actually received: £46,000 from this year's invoices, plus the £4,000 collected from last year's outstanding work, giving total income of £50,000. Her expenses are what she actually paid out: £9,500 in running costs, including that £600 relating to the earlier period, plus her £1,200 laptop, which the cash basis generally allows you to deduct in full at the point of payment for most equipment, aside from cars. Total expenses come to £10,700. Her cash basis profit for the year is £39,300.

Under the accruals basis, her income is what she genuinely earned during the year, the full £52,000 she invoiced, regardless of whether it's been paid yet, excluding the £4,000 that actually related to work done and earned the previous year. Her expenses are recalculated to reflect only costs genuinely incurred during this period, excluding the £600 relating to the earlier year, giving £8,900 in running costs. The laptop is typically treated through capital allowances rather than as a straightforward expense, though for most sole traders the Annual Investment Allowance still permits the full £1,200 to be deducted in the year of purchase regardless. Her accruals basis profit for the year comes to £41,900.

Same business. Same underlying activity. A genuine £2,600 difference in reported profit, purely from the timing method chosen. Neither figure is wrong; they're simply measuring different things, cash movement versus economic activity, and it's precisely why understanding which method applies to you matters.

Which Method Genuinely Suits Your Business?

The cash basis suits the majority of straightforward service-based sole traders well, particularly those who invoice and get paid relatively promptly, with modest levels of unpaid work sitting on the books at any given time. It's simpler, requires less detailed record-keeping around debtors and creditors, and since the 2024 changes, it now also permits full relief on interest and finance costs without the old £500 annual cap, alongside more flexible loss relief than it previously allowed.

Accruals accounting tends to suit businesses with more significant timing mismatches between work done and money received, or those holding meaningful stock or work in progress at their year-end, a retailer with substantial seasonal stock, for instance, or a business regularly waiting extended periods for large invoices to clear. It can also occasionally produce a more favourable profit figure for tax planning purposes, depending on the specific pattern of your debtors and creditors in a given year, which is worth reviewing properly with your accountant rather than assuming the default automatically suits you.

A builder's merchant client of ours near Ashford, holding meaningful stock and often waiting sixty to ninety days for larger trade accounts to settle, found accruals accounting gave a genuinely more accurate, useful picture of his business's actual performance through the year, even though the cash basis would have been the default without an active election otherwise.

The Tax Year Basis: Another Genuine Change Worth Understanding

Alongside the cash basis default, another significant reform has reshaped how profit is calculated for many sole traders: the move to taxing profits on a strict tax year basis, fully in effect from the 2024/25 tax year onwards. If your accounting year end already falls on, or close to, 5 April, this changes very little for you in practice. But if you've historically prepared accounts to a different date, say, a financial year ending 30 June, your taxable profit for a given tax year is now calculated by apportioning figures across two separate accounting periods to match the actual 6 April to 5 April tax year, rather than simply using whichever accounting year happened to end within that period, as was the case under the old rules.

If you're one of the sole traders who transitioned through this change back in 2023/24, you may still be working through "transition profit," additional profit that arose from the changeover, which HMRC allowed to be spread in instalments across five tax years rather than taxed all in one go. If that applies to you, a portion of that spread transition profit is likely still affecting your calculation for 2026/27, so it's genuinely worth confirming with your accountant exactly where you stand in that spreading period, rather than assuming the transition is fully behind you.

Capital Allowances: A Quick, Necessary Word

We've touched on this already through the laptop example, but it deserves its own brief explanation. Larger, longer-lasting purchases, equipment, machinery, vehicles, are generally treated differently from your everyday running costs. Under the cash basis, most capital items, aside from cars, can simply be deducted in full at the point you pay for them, folded straightforwardly into your expense total. Under accruals accounting, these purchases are typically identified separately and relieved through capital allowances, most commonly the Annual Investment Allowance, which for the overwhelming majority of small business purchases still permits a full deduction in the year of purchase, just recorded and presented slightly differently within the accounts themselves.

Cars are treated differently under both methods, generally relieved gradually over several years based on the vehicle's emissions, rather than deducted in full immediately, regardless of which overall accounting method you're using.

Stock and Work in Progress: Relevant for Some, Not All

If your business holds physical stock, a retailer, a business selling finished goods, this is an area worth a direct conversation with your accountant, since the treatment differs meaningfully between the two methods and can genuinely affect your profit figure at year-end, particularly if stock levels have changed significantly during the year. For most straightforward service-based sole traders across Kent, tradespeople, consultants, therapists, this simply isn't a relevant consideration; you're not typically holding meaningful stock at your year-end in the way a shop or wholesaler would be.

The Single Most Common Mistake We See in Profit Calculations

We want to flag this directly, because it's genuinely one of the most frequent errors we encounter, and it can meaningfully distort a business owner's understanding of their own figures. Your own wages, salary, or drawings, however you think of the money you personally take out of the business to live on, are never a business expense.

This catches out a genuine number of newer sole traders. A landscape gardener client of ours near Ashford, in his first year of trading, had been mentally deducting a rough "salary" for himself before arriving at what he considered his profit figure, assuming that's simply how a business's finances worked. It isn't, for a sole trader specifically. Your profit is your income, in the sense that whatever's left after genuine business costs are deducted is what you're taxed on, regardless of how much of it you've actually withdrawn from the business bank account for personal use during the year. Money you take out for yourself is a drawing, not an expense, and it has no effect on your calculated profit or your tax bill whatsoever.

Another Common Mistake: Forgetting Cash-in-Hand or Less Formal Income

For trades that occasionally receive cash payments outside of a formal invoicing system, a small job paid directly in cash, for instance, it's worth being genuinely thorough about including every source of income in your calculation, not just what passes through a bank account or accounting software automatically. A driving instructor client of ours occasionally receives cash payment for individual lessons; keeping a simple, consistent log of every payment received, regardless of method, ensures his profit calculation, and his eventual tax bill, properly reflects his actual full income, protecting him from the genuine risk of an inaccurate return if cash income were ever inadvertently left out.

Putting the Full Calculation Together

Bringing this together into a clear, practical sequence: start with your total income for the year, calculated according to whichever method applies to you, cash received or amounts genuinely earned. Deduct your allowable business expenses, again calculated consistently with your chosen method. Deduct any capital allowances due on qualifying equipment or vehicle purchases, if using accruals accounting, or the full cost of most equipment if using the cash basis. The resulting figure is your taxable profit, the number that then feeds into the Income Tax and National Insurance calculations we've covered in previous articles.

A Genuinely Practical Recommendation

If you've never actually confirmed which method your accounts are being prepared under, that's worth checking directly, since it happened automatically for most sole traders back in 2024 without necessarily being clearly flagged at the time. If your business involves meaningful stock, significant unpaid invoices sitting at year-end, or genuinely complex timing between work done and money received, it's worth a proper conversation about whether cash basis or accruals accounting produces a fairer, more useful picture of your actual business performance, rather than simply accepting the default without ever having reviewed it.

How We Help Sole Traders Get This Right

As a two-partner practice based in Folkestone, we review every client's accounting method properly, rather than assuming the cash basis default automatically suits every business we work with. For straightforward service-based sole traders across Folkestone, Dover, and Deal, it very often does. For businesses with more complex timing, stock, or debtor patterns, particularly some of the trades and retail businesses we work with near Ashford and Canterbury, we'll walk through the comparison properly and help you choose deliberately, rather than by default.

If you're unsure which method currently applies to your business, or whether it's still the right one for you, get in touch with us at Cannon Accountants. We'll review your specific situation and make sure your profit is being calculated properly, and to your genuine advantage.

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Frequently Asked Questions

Do I need to actively choose the cash basis, or does it just happen automatically?

It's genuinely automatic; unless you actively elect to use accruals accounting instead through your Self Assessment return, HMRC assumes you're using the cash basis by default. If you've never made that election and aren't sure which applies to you, it's worth confirming directly with your accountant.

Can I switch from the cash basis to accruals accounting, or vice versa, in future years?

Yes, you can elect to move onto accruals accounting for a given tax year, and that election generally continues to apply for subsequent years until you actively elect to move back to the cash basis. It's not a decision to change casually year to year, so it's worth getting right with proper advice rather than switching back and forth.

Does my chosen method affect how much tax I ultimately pay, or just when I pay it?

Both, genuinely. In most cases, the difference between methods is primarily about timing, when income and expenses are recognised, but because tax rates and thresholds can shift between years, and because a large invoice landing in one tax year rather than another can affect which tax band you fall into, the method chosen can have a genuine, lasting effect on your overall tax position, not merely its timing.

What if I hold some stock but I'm not a traditional retailer?

Even a modest amount of stock or materials held at your year-end, a tradesperson with unused materials on hand, for example, is worth mentioning to your accountant specifically, since the treatment can differ from straightforward day-to-day running costs and may affect your profit calculation more than you'd expect.

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