Turnover, profit and cash are three stages of the same money, and each one has a different job. Mixing them up causes more tax and cash-flow surprises for the self-employed than anything else. Here’s what each number means, and which one HMRC looks at.
| Number | What it is | What it decides |
|---|---|---|
| Turnover | All the money in from sales, before any costs | Whether you must register for VAT |
| Profit | Turnover less allowable expenses | Your Income Tax and National Insurance |
| Cash | What’s actually in your bank account | What you can spend, once tax is set aside |
One business, three numbers
Jordan is a personal trainer. Here’s his 2026/27 on the cash basis:
| Jordan’s 2026/27 (cash basis) | Amount |
|---|---|
| Turnover: money in from sales | £52,000 |
| Costs paid | −£13,000 |
| Profit: what his tax is worked out on | £39,000 |
| Drawings: money he took out for himself | −£10,000 |
| Cash left in the bank | £29,000 |
His tax and NI on £39,000 profit is about £6,872: £5,286 Income Tax plus £1,586 Class 4 NI. That’s due whether or not the money is still in the bank. So the £29,000 isn’t all his. Once tax is set aside, about £22,128 is genuinely spare, before any supplier bills he still owes.
Key point: tax is worked out on profit, not on turnover or what’s in the bank.
If Jordan also has to make payments on account, his first January bill will be bigger than £6,872. Why is my January tax bill so big? explains how that works.
Drawings aren’t a cost
Drawings are the money a sole trader takes out for themselves. They feel like an expense, because the money leaves the business account, but they aren’t a business cost. They don’t reduce your profit, so they don’t reduce your tax. Jordan’s £10,000 of drawings came out of money he’d already been taxed on.
Turnover decides VAT, not profit
Leon ignored VAT because his profit was only £15,000. But the VAT test looks at turnover:
| Leon’s 12 months to 31 July 2026 | Amount |
|---|---|
| Taxable sales | £91,000 |
| Costs | −£76,000 |
| Profit | £15,000 |
His taxable sales over those 12 months were above the £90,000 threshold. He had to tell HMRC by 30 August 2026 and was VAT-registered from 1 September 2026, whether or not he’d charged his customers VAT.
- Look back every month. Add up your taxable turnover for the last 12 months. If it’s over £90,000, tell HMRC within 30 days of the end of that month.
- Look forward too. If you expect to go over £90,000 in the next 30 days alone, you must register by the end of that 30-day period.
Cash basis or traditional accounting?
Most sole traders use the cash basis, which is now the default. Income counts when you receive it and costs count when you pay them, so your profit follows your bank account fairly closely.
You can choose traditional accounting instead. Then profit counts invoices and bills when they’re raised, not when the money moves. A big invoice sent in March but paid in May counts in the earlier tax year, so profit and cash can drift further apart.
See your own numbers. Enter your profit and get an estimate of your Income Tax and NI, with a sole trader vs limited company comparison.
Estimate my tax billYour next 0.01%
- Open a separate business bank account. When business and personal money are mixed, none of these three numbers is easy to see.
- Set tax aside every time you’re paid. How much tax should I set aside? gives you a dated monthly plan.
- If your sales are getting close to £90,000, check your rolling 12-month turnover at the end of every month.
You can’t improve a lift you don’t track. Your finances work the same way: know your numbers first.
The full picture, free. 48 pages for sole traders and company directors, with every example worked through.
Get the UK Tax GuideFrom The UK Tax Guide 2026/27 (chapters 1, 3 and 5), checked against GOV.UK on 21 October 2026. Sources: Income Tax rates · Self-employed National Insurance rates · Register for VAT · Cash basis. Assumes a sole trader in England with no other income and all costs allowable. Educational information, not tax advice. Check GOV.UK or speak to a qualified adviser before acting.