Is net profit the same as profit after tax?

Not always. Net profit is often quoted before tax. Net profit after tax deducts tax too. Say which figure you mean and check the label on the profit and loss statement.

Can gross profit be positive and net profit negative?

Yes. A business with £80,000 gross profit and £90,000 operating expenses makes a £10,000 loss before interest and tax. Its sales cover direct costs but do not cover its overheads.

What is a good gross margin?

It varies by sector and business model. There is no universal figure. Compare your margin with your own history and relevant sector figures, using consistent cost classifications.

Is turnover the same as gross profit?

No. Turnover is sales revenue before deducting business costs. Gross profit is turnover minus cost of sales.

Does gross profit include VAT?

VAT-registered businesses normally show revenue and costs excluding VAT. Irrecoverable VAT forms part of the relevant cost. Calculate gross profit using figures on the same VAT basis.

Gross profit vs net profit (with examples)

What is the difference between gross profit and net profit?

Gross profit is sales minus the direct cost of making or buying what you sold (cost of sales). Net profit is what is left after all other business costs too: overheads, interest and, for net profit after tax, tax.

The difference between gross and net profit is the range of costs deducted. Gross profit shows what remains from sales to cover the rest of the business. Net profit shows what remains once those wider costs are paid for.

Use figures from the same period. Comparing annual sales with one month of costs will give a misleading result. Profit also differs from cash in the bank: customers may still owe you money.

How to calculate gross profit

Gross profit = Revenue − Cost of sales

Gross margin % = Gross profit ÷ Revenue × 100

To work out gross profit, start with sales revenue for the period. Subtract the direct costs of the goods or services sold in that period. The gross profit calculation gives a pound amount. Gross margin expresses that amount as a percentage of sales.

Include in cost of sales: stock or materials used, direct labour, and delivery to customers where directly tied to sales.
Keep in operating expenses: rent, admin salaries, marketing and general business software.

For a retailer, use the cost of stock sold, rather than every stock purchase. Opening stock plus purchases minus closing stock gives the stock cost used in the period. Unsold stock remains an asset.

Service businesses may have little or no cost of sales. Direct project labour or subcontractors may belong there, depending on the work. Classify costs consistently so comparisons between periods remain useful.

Margin uses revenue as its denominator. Markup uses cost. They are different percentages, even when calculated from the same sale.

How to calculate net profit

Net profit before tax = Gross profit − operating expenses − interest (± other income)

Net profit after tax = Net profit before tax − tax

For a limited company, the tax line is Corporation Tax. Accounting profit and taxable profit can differ, so do not apply a tax rate to this example to estimate a bill.

Net margin % = Net profit ÷ Revenue × 100

State whether you use net profit before or after tax. This guide uses profit before tax for the worked net margin. Add other income where relevant and deduct other costs shown in your accounts.

Operating expenses include the costs of running the business, such as rent, admin salaries, marketing and software. Include depreciation where applicable. Loan interest is a cost, but repaying the loan principal is not a profit and loss expense.

Worked example

A small retailer has the following annual figures. Revenue and costs use a consistent VAT basis. There is no other income in this example.

P&L line	Amount	Calculation or margin
Revenue	£200,000	Total sales
Cost of sales	£120,000	Direct costs of goods sold
Gross profit	£80,000	£200,000 − £120,000; gross margin 40%
Operating expenses	£50,000	Overheads
Interest	£2,000	Borrowing costs
Net profit before tax	£28,000	£80,000 − £50,000 − £2,000; net margin 14%

Gross margin is £80,000 ÷ £200,000 × 100 = 40%. For every £1 of sales, 40p remains after direct costs. Net margin before tax is £28,000 ÷ £200,000 × 100 = 14%.

The £28,000 is before tax. No tax figure or profit after tax is calculated here.

Gross vs net profit at a glance

Comparison	Gross profit	Net profit
What it measures	Profit from sales after direct costs	Profit after the wider costs of running the business
Costs deducted	Cost of sales	Cost of sales, operating expenses, interest and tax if stated after tax
Where on the P&L	After revenue and cost of sales	Near the bottom, before or after the tax line as labelled
What it tells you	Whether pricing covers direct costs	Whether the whole business makes money

Gross and net in other contexts

Gross pay is pay before deductions; net pay is take-home pay after deductions. Use our salary calculator to explore the difference.

A price gross of VAT includes VAT; a price net of VAT excludes it.

Why both numbers matter

Gross margin shows how pricing and direct costs affect trading. Net profit shows whether the whole business makes money after overheads and interest too.

A falling gross margin can point to supplier price rises, discounts or a different sales mix. A steady gross margin with falling net profit can point to higher overheads. Check the underlying entries before deciding what to change.

Review both figures regularly and compare like periods. Seasonal sales, stock adjustments and one-off costs can change the picture. Keep your cost classifications consistent.

If you need a gross profit calculator, use our pricing and margin calculator to test pricing and margin. It helps you explore direct costs and selling prices; overheads still need to be considered separately.

Read understanding your profit and loss to see how these figures fit into the full statement.

Gross profit vs net profit: the difference and how to calculate them

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