Guidance

HS222 How to calculate your taxable profits (2025)

Updated 6 April 2025

The following guidance includes calculations.

If you carry on a business (a trade, profession or vocation) you must work out your taxable profits, using either:

• cash basis accounting — you record income when you get it and expenses when you pay them
• traditional accounting (accruals basis) — you record income when you invoice your customers and expenses when you receive a bill

Read cash basis for information on cash basis accounting. You will find more information on traditional accounting further on in this guidance.

The way taxable profits are worked out for the tax year has changed. Read changes to reporting income from self employment and partnerships for information on what the new tax year basis is.

Receipts from self-employment and miscellaneous income of £1,000 or less are exempt from tax under the trading income allowance.

Individuals with total receipts of more than £1,000 can elect to calculate their profits by deducting the allowance instead of allowable business expenses (including capital allowances).

Read tax-free allowances on property and trading income for more information on the trading income allowance.

1. Records

You must keep records of your business transactions. Whatever accounting basis you use, your records must include all your:

• sales and takings (income)
• purchases and expenses

You will normally need other records too.

Some businesses use a flat rate (simplified expenses) instead of the actual expenses to work out business:

• costs for vehicles
• use of home or private use of business premises (not both)

Read business records if you’re self-employed for more information on records.

Read simplified expenses if you’re self-employed for more information on simplified expenses.

2. Accounting periods (periods of account)

Your accounting period is the period your accounts cover. If you’re a new business your accounting period starts on the date your business started. If you’re not a new business your accounting period starts on the day after the end of your previous accounting period. For example, if you made your accounts up to 5 April 2024, your new accounting period starts on 6 April 2024.

Your accounting date is the last day of your accounting period. You choose your accounting date. Normally you make your accounts up to the same date each year.

If you’re a new business you may find your tax computation is easier if you choose 5 April as your accounting date as that is the end of the tax year, or 31 March, 1, 2, 3, or 4 April.

If you’re not a new business and you have previously chosen a date earlier than 31 March as your accounting date, you can continue to do so but for 2024 to 2025 onwards you will need to adjust your profits to work out your profits for the tax year. Read changes to reporting income from self employment and partnerships for information on what the new tax year basis is.

3. Entering the cash basis

If you have an existing business and you are switching over from traditional accounting to the cash basis, you might have to make some one-off adjustments to work out your profit in this period. The table shows if you need to make an adjustment, and if so, how to make it.

When you need to make an adjustment	How to do the one-off adjustment
If your customers owed you money at your accounting date last year, and you paid tax on that amount in that tax year, and your customers have paid you in this accounting period.	Take away the amounts owed to you from your total cash basis turnover for this accounting period.
If you owed money to your suppliers at your accounting date last year, and you received tax relief on that amount in that tax year, but you did not pay your supplier until this accounting period.	Take away the amounts owed to your suppliers from your total cash basis expenses for this accounting period.
If you had a stock of items at your accounting date last year, but you did not get tax relief for the cost.	Add the cost of those items of stock to your cash basis expenses for this accounting period.
If you received money from your customers in your accounting period last year (for example, payments made in advance of work done) that you did not pay tax on.	Add the amounts that your customers paid you (but you were not taxed on) to your total cash basis turnover for this accounting period.
If you paid money in advance for certain items in your accounting period last year (for example, a subscription, or a deposit) that you did not get tax relief for.	Add the amounts that you paid to your suppliers (which you did not get tax relief for) to your total cash basis expenses for this accounting period.
If you paid in full for items of equipment (but not cars), and you had a balance of capital allowances (read capital allowances and balancing charges further on in this guidance for more information) still to claim on that equipment, at the end of your accounting period last year.	Add the balance of capital allowances you can still claim to your total cash basis expenses for this accounting period.
If you partly paid for items of equipment (for example, by instalments) by the end of your accounting period last year, but you had claimed a different amount.	If the amount you partly paid was more than the capital allowances claimed, we treat the difference as an expense (increasing your total cash basis expenses) as a transitional adjustment for this accounting period. If the amount you partly paid was less than the capital allowances claimed, we treat the difference as turnover (increasing your total cash basis turnover) as a transitional adjustment for this accounting period.

There are examples of how the adjustment is calculated in Business Income Manual paragraphs 70065-70069.

If this is your first tax period with self-employment income, you will not need to make any adjustments.

4. Leaving cash basis

If you have an existing business and you’re switching over from cash basis to traditional accounting you need to work out an overall adjustment. This can be either:

• a negative adjustment that’s allowed as an expense in this accounting period
• a positive adjustment that’s income of your business (adjustment income) and is normally taxed over 6 years starting this year

Working sheet 1 tells you how to work out the adjustment and what to do with it. There is an example in Business Income Manual paragraph 70071.

5. Traditional accounting (accruals basis)

The following notes are not a complete guide. If you need more information on traditional accounting contact your tax adviser.

5.1 Records

The records you must keep include all your:

• sales and takings (income)
• purchases and expenses

The records you may keep include:

• business assets you’ve bought (for example, stock or equipment)
• value of stock and work in progress at the end of your accounting period
• details of payments to employees (for example, wages, expenses or benefits)
• business vehicle and travel costs, business miles travelled if you use simplified expenses
• interest from any bank or building society accounts
• other money coming in, such as, money you invest in your business

5.2 Expenses

Only include business expenses in your accounts if they belong to that accounting period. If an expense covers more than one accounting period, you will need to spread that cost. For example, if your rent is payable 12 months in advance halfway through your accounting period, include half of the rent payable in the previous accounting period and half of the rent payable in this accounting period as an expense in your accounts for this year. Include the other half of the rent payable in this accounting period in your accounts for next year.

5.3 Cost of sales

This is the cost of any raw materials and goods bought for resale which you used during your accounting period. Use Working sheet 2 to help you work out how much you can claim. Do not include items received in your last accounting period that you paid for in this accounting period.

6. Allowable business expenses: cash basis and traditional accounting

The table lists the main categories of expenses that businesses have. Not all expenses are allowed for tax. If you include all of the expense when you work out your profit you must add the non-allowable expenses, or the non-allowable part of the expense, to the profit.

Category	Allowable expenses	Non-allowable expenses
Cost of goods that you are going to sell or use in providing a service	Use Working sheet 2 if you use traditional accounting. Amount paid for goods bought for resale, if you use cash basis.	Normal selling price of goods or materials taken for private use. Cost of goods taken for private use.
Construction industry — payments to subcontractors	Construction industry subcontractor’s payments (before taking off any tax).	Payments for non-business work.
Wages, salaries and other staff costs	Wages, salaries, bonuses, pensions, benefits for staff or employees, employers’ National Insurance contributions, agency fees, and so on.	Own wages, drawings, pension payments, National Insurance contributions, if included in expenses. Payments for non-business work.
Car, van and travel expenses	Motoring costs such as car and van insurance, repairs, servicing, fuel, hire charges, vehicle licence fees, AA or RAC membership or the flat rate amount for vehicles. If you use cash basis, the cost of vehicles other than cars. Train, bus, air and taxi fares, hotel room costs. Meals on overnight business trips.	Non-business (private use proportion of) motoring costs. No adjustment if you use the flat rate amount. 15% of the hire charge or rental cost on leased cars with CO2 emissions over 50g per km, unless you use the cash basis. Fines. The cost of buying vehicles or, if you use cash basis, the cost of cars. Travel costs between home and business. Other meals.
Rent, rates, power and insurance costs	Rent for business premises, business and water rates, light, heat, power, property insurance, security. If you use your home for business, the business proportion of the expenses or flat rate amount.	Costs of buying the premises. If you live on the business premises, expenses of any private part of the premises or the flat rate amount.
Repairs and maintenance of property and equipment	Repairs and maintenance of business premises and equipment. The cost of equipment and tools, if you use cash basis.	Repairs of non-business parts of premises or equipment. Costs of buying, improving or altering premises. Cost of equipment and tools, if you use traditional accounting.
Phone, fax, stationery and other office costs	Phone, mobile, internet, email and fax running costs. Postage, stationery, printing, small office equipment and computer software costs. If you use cash basis, the cost of equipment.	Non-business or private use proportion of expenses. Ignore private use of telephone and broadband service if this is insignificant. New phone, fax, computer hardware or other equipment costs if you use traditional accounting.
Advertising and business entertainment costs	Advertising in newspapers, directories and so on, mailshots, free samples, website costs.	Entertaining clients, suppliers and customers. Hospitality at events.
Interest on bank and other business loans	Interest on bank and other business loans. Alternative finance payments.	Repayment of the loan, overdraft or finance arrangements.
Irrecoverable debts written off	Amounts included in turnover but unpaid and written off (due to being unrecoverable). Not relevant if you use cash basis.	Debts not included in turnover. Debts relating to fixed assets. General bad debts.
Accountancy, legal and other professional fees	Accountants, solicitors, surveyors, architects and other professional fees. Professional indemnity insurance premiums.	Legal costs of buying property. Legal costs of buying equipment if you use traditional accounting. Costs of settling tax disputes. Fines for breaking the law.
Depreciation and loss or profit on sale of assets	Read capital allowances and balancing charges further on in this guidance.	Depreciation of equipment, cars and so on. Losses (minus any profits) on sales of assets (traditional accounting). Losses (minus any profits) on sales of cars (cash basis).
Other business expenses	Trade or professional journals and subscriptions, other sundry business running expenses not included elsewhere.	Payments to clubs, charities, political parties and so on. Non-business part of any expenses. Cost of ordinary clothing.

7. Allowable business expenses: cash basis capital expenditure

If you use the cash basis you can deduct the amounts you pay for capital items, with the exception of expenditure on or in connection with:

• the acquisition or disposal of a business or part of a business
• education or training
• the provision, alteration or disposal of an asset which is not a depreciating asset
• an asset not acquired or created for continuing use in the trade
• a car
• land
• non-qualifying intangible assets
• a financial asset

An asset which is not a depreciating asset is an asset which either:

• has a useful life that will not end
• will not decline in value by 90% or more within 20 years of the date of the expenditure

The useful life of an asset ends when it could no longer be of any use to any person for any purpose, as an asset of the business.

8. Tax year basis

The way taxable profits are worked out for the year has changed. Read changes to reporting income from self employment and partnerships for information on what the new tax year basis is.

You will pay tax on the profits for the tax year. You may have to apportion your profits or losses if your accounting period does not coincide with the tax year. Apportionment is not required where an accounting period ends on 31 March, or 1, 2, 3 or 4 April (late accounting date).

There are examples of how to apportion profits to the tax year in Business Income Manual paragraph 81201.

9. Spreading of 2023 to 2024 transition profits

You may have transition profits remaining to be taxed if your business started before 6 April 2022 and you were affected by basis period reform in 2023 to 2024. Transition profits are spread over five tax years. At least 20% of the original amount of transition profits will have been taxed in 2023 to 2024. 25% of the remaining transition profits will be included in your taxable profits for 2024 to 2025.

If you did not have any transition profits, or if all of your transition profits were taxed in 2023 to 2024, spreading does not apply in 2024 to 2025.

You can elect to increase the amount of transition profits included in your taxable profits for 2024 to 2025 — this will reduce the amount of transition profits taxed in future years. You cannot elect to reduce the amount below 25% of the remaining transition profits. There are examples of spreading transition profits in Business Income Manual paragraph 81310.

If your business ceased in 2024 to 2025 all of the remaining transition profits will be included in your taxable profits for 2024 to 2025.

10. Days following a late accounting date and businesses starting on or after 1 April 2025

A late accounting date is an accounting date of 31 March or 1, 2, 3 or 4 April 2025. Profits of the days after a late accounting date to 5 April 2025 are not included in the taxable profits for 2024 to 2025, unless your business ceased on or before 5 April 2025. They will instead be included in the taxable profits for 2025 to 2026.

Similarly, if your business started on 1, 2, 3, 4 or 5 April 2025 you will not need to calculate the taxable profits for 2024 to 2025. These profits will instead be included in the taxable profits for 2025 to 2026.

11. Capital allowances and balancing charges

When working out your business profits using traditional accounting do not take off the cost of buying or improving items such as a car, equipment or tools that you use in your business, depreciation or any losses which arise when you sell them. Instead, you can claim tax allowances called capital allowances. You take off the allowances from your profit to find your taxable profits or add them to your losses to get your allowable loss.

Usually, anything you use that has a useful economic life of at least 2 years may qualify for capital allowances.

Capital allowances do not apply to items that you buy and sell as part of your trade, these items are included in business expenses.

If you’ve claimed capital allowances, an adjustment, known as a balancing charge, may arise when you sell an asset, give it away or stop using it in your business. We add the balancing charge to your taxable profits, or take them off your losses, in the year they occur.

If you’re using cash basis, you can only claim capital allowances on cars. The cost of all other equipment and vehicles is an allowable expense in working out your business profits.

You can choose between claiming capital allowances or flat rate expenses for a car but you must continue to use the same method for the whole of the time it is used in the business.

If you are claiming the trading income allowance you cannot claim capital allowances.

Read capital allowances and balancing charges (Self Assessment helpsheet HS252) for more information.

12. Losses — terminal loss relief

If your trade ceased in 2024 to 2025 and you made a loss in your final 12 months of trading, you can claim terminal loss relief against your profits from the same trade.

Your terminal loss must be set against any profits (after deducting losses brought forward) from the same trade taxed in 2024 to 2025. If any terminal loss remains it must be set against the profits of the same business taxed in the 3 prior years. Start with the latest year.

Put the amount of terminal loss relief you are claiming against your 2024 to 2025 profits in box 74 on page SEF 4 of the ‘Self-employment (full)’ pages or box 17 on the ‘Partnership’ pages. This is in addition to any other losses you’re bringing forward from earlier years.

Put the total amount of terminal loss relief for the 3 prior years in box 79 on page SEF 4 of the ‘Self-employment (full)’ pages or box 23 on the ‘Partnership’ pages. Give details of the amount for each year in box 103 ‘Any other information’, on your ‘Self-employment (full)’ pages or in box 19 ‘Any other information’, on your tax return.

Make sure that you do not count the same loss twice.

Read relief for trading losses (Self Assessment helpsheet HS227) for more information on terminal losses and how to calculate your terminal loss.

13. VAT

For VAT-registered businesses using the cash basis, business receipts and payments may be recorded either excluding or including VAT. If VAT is included, the net VAT payments to HMRC should be recorded as expenses and net repayments from HMRC as receipts.

For those not using the cash basis, VAT should be accounted for using Generally Accepted Accounting Principles (GAAP).

14. Partners’ trading or professional profits and other partnership income

The way taxable profits are worked out for the year has changed. Read changes to reporting income from self employment and partnerships for information on what the new tax year basis is.

You will pay tax on your share of the partnership’s profits and other income for the tax year. You may have to apportion your share of the partnership’s profits, losses and other income if the partnership’s accounting period does not coincide with the tax year. Apportionment is not required where a partnership has a late accounting date.

15. What to do if you dispute your share of the partnership’s profit or loss

If you believe that the figure reported for your share of the partnership’s profit (or loss) on your Partnership Statement is incorrect, you can make a referral to the Tribunals Service. The Tribunals Service is a body independent of HMRC with the authority to determine the correct share of the partnership’s profits to be reported. HMRC is bound by its decision.

You can do this by writing to:

First-tier Tribunal (Tax Chamber)
HM Courts & Tribunals Service
PO Box 16972
Birmingham
B16 6TZ

When you write to the Tribunals Service, please head it with the reference ‘Dispute of my share of partnership profit/loss’ and include the following information:

• your name, address and Unique Taxpayer Reference (UTR)
• name, address and UTR of the partnership
• reporting partner’s name
• nature of dispute

You must also notify both the Reporting Partner of the partnership (this will be the partner nominated to act for the partnership in relation to the return, claim or other matters) and HMRC that you have made this application to the tribunal. You should contact the most appropriate team in HMRC that relates to the nature of your tax affairs.

Any such referral must be made before the end of the period of 12 months beginning with either the day after:

a) the day on which the partnership return was delivered
b) if the dispute relates to an amendment to the partnership return, the day on which the amendment was made

For example, if the partnership return was delivered on 31 January 2024, you will have until 31 January 2025 to make a referral to the tribunal.

You should return the same figure in your personal tax return as reported to you in the Partnership Statement even if you are making a referral to the Tribunals Service.

It must be noted that if you choose to report a different figure for your share of the partnership’s profit or loss in your personal return than as shown on the Partnership Statement, you may become liable to a penalty if the tribunal subsequently determines the share on the Partnership Statement is correct.

Read our factsheet compliance checks for penalties of inaccuracies in returns or documents (CC/FS7a) for more information about penalties for inaccuracies in returns.

16. Contact

Online forms, phone numbers and addresses for advice on Self Assessment.