Taxable profit is simply the amount of your business income that’s subject to tax, calculated by subtracting your allowable business expenses from your total income.
For creatives – if you’re an artist, musician, filmmaker, designer, or content creator – understanding your taxable profit can be life-saving.
It directly influences how much tax you’ll pay, impacts your eligibility for loans and funding, and helps you manage cash flow effectively.
Track your taxable profit, ensure compliance with HMRC, avoid penalties from the HMRC new penalty regime, and keep more of your hard-earned money to invest back into your creative ventures.
Creative Takeaways
- Taxable profit formula – Total income minus allowable expenses.
- Net vs. taxable profit – Adjust for non-allowed expenses and allowances.
- Previous losses impact – Offset past losses to reduce tax.
- Capital allowances – Reduce taxable profit with asset deductions.
Table of contents
1. Total income connection to taxable profit
Total income refers to all the money your business earns before deducting any expenses.
It includes all the payments you receive from your professional activities:
- Client fees (commissions, freelance contracts)
- Product sales (artworks, digital downloads, merchandise)
- Licensing and royalties (music streaming, images, video content)
- Earnings (workshops, teaching, or performances)
- Any grants or funding (related directly to your business activities)
Understanding total income is the starting point for working out your taxable profit.
Once you know your total income, you subtract allowable business expenses – like studio rent, equipment, software subscriptions, or professional fees – to arrive at your taxable profit.
In simple (mathematical) terms:
Total Income – Allowable Expenses = Taxable Profit
2. Difference between taxable income vs taxable profit
Many people mix up taxable income and taxable profit, but they’re not the same thing.
Here’s a simple breakdown:
- Taxable Income: This refers to the amount of your income that HMRC taxes after deducting your personal allowance and any other reliefs. It’s your final income figure used to calculate how much tax you owe personally.
- Taxable Profit: This is specific to your business. It’s calculated by subtracting allowable business expenses from your total business income.
Let’s say Emma is a freelance illustrator earning £35,000 total business income this year. After deducting allowable business expenses (£5,000), her taxable profit is £30,000. From this £30,000 taxable profit, Emma deducts her personal allowance (£12,570 is the amount of income you do not have to pay tax on), leaving £17,430 as her taxable income – the amount she pays personal tax on.
3. How to calculate your taxable profit (vs net profit)
The basic difference between net profit and taxable profit are the sum of the non-allowable expenses you need to add back to net profit and the allowable taxable deductions that can be taken away from net profit in order to calculate taxable profit.
Let’s break this down, too:
Your net profit and your taxable profit are two different numbers.
Step 1: Calculate your net profit
First, you calculate your business’s net profit by taking your total income and subtracting all your expenses for the accounting year. This gives you the basic profit figure from your business operations.
Step 2: Add back non-allowable expenses
The authorities don’t allow certain expenses to reduce your tax bill, even though they’re legitimate business expenses.
You need to add these back to your net profit:
- Depreciation (the tax system handles this differently through capital allowances)
- Personal or private expenses
- Fines and penalties
- Entertainment costs
- Certain gifts
If your net profit is $50,000, but includes $5,000 in non-allowed expenses, you’d add that back to get $55,000.
Step 3: Subtract additional allowances
The tax system provides certain allowances that weren’t in your original calculations.
The most common is capital allowances, which is the tax system’s way of accounting for the cost of assets (instead of depreciation). These reduce your taxable profit.
If you have $8,000 in capital allowances, this would reduce the $55,000 figure to $47,000.
Step 4: Apply previous losses
If your business had losses in previous tax years that you haven’t yet used, you can apply these against your current year’s profit. This further reduces your taxable profit.
If you had $7,000 in unused losses from previous years, this would reduce your taxable profit to $40,000.
Step 5: Taxable profit
The figure you end up with after all these adjustments is your taxable profit – the amount on which you’ll actually pay tax.
Think of it as this formula:
Taxable Profit = Net Profit + Non-Allowable Expenses − Allowable Taxable Deductions (– Previous Losses)
HMRC has a full guide on its website on how you can calculate your taxable profits: submenus include all possible considerations.
4. Manage your accounting period and profits as a creative
Let’s be honest: the maze of taxable profits can be overwhelming – it’s a job we also have to spend time on.
We can only imagine what it’s like when your passion lies in creating, rather than crunching numbers. But understanding this aspect of your creative business empowers you like a superhero, so you can keep money where it belongs: invested in your creativity.
If this feels complicated, but you’re not alone.
That’s exactly why we’re here: to simplify the complexity and guide you safely through the taxable profit maze.
We’ll help you stay compliant with HMRC, steer clear of costly penalties, and ensure your creative business thrives.
Ready to focus more on your art and less on your accounts? Let us handle the numbers!
