Profit for tax is not always the same as the profit shown in your accounts. It is also not the same as the money sitting in your bank account. Your business profit, your accounting profit and your taxable profit can all tell different parts of the story. In this episode, we explain why those differences matter, how tax authorities look at business costs, and why understanding taxable profit helps you plan your tax bill with more confidence.

About this episode

Tax is a business cost. Because of that, it needs planning, budgeting and proper understanding.

This episode follows on from our discussion about how to budget for your tax bill. That earlier episode focused on putting money aside. Here, we look at the profit figure that tax is based on.

The important point is simple: the figure you think of as business profit may not be the same figure HMRC uses when calculating tax. Some costs make sense in the business accounts, but tax rules may treat them differently.

Why profit for tax matters

Profit is still one of the key measures of business performance.

In your accounts, profit usually compares the income your business generates with the costs linked to earning that income. That helps you understand whether the business is making money, supporting customers and building something sustainable.

However, tax authorities work from a different rule book. They are not just looking at whether the business cost feels sensible. They look at whether tax law allows that cost when working out taxable profit.

For the wider profit foundation, see What Is Profit? Gross Profit and Net Profit Explained.

Profit, cash and taxable profit are different

Money in the bank is not the same as profit.

You may have cash in the bank because customers have paid quickly, because you have delayed paying suppliers, or because you have borrowed money. That does not automatically mean the business has made taxable profit.

At the same time, your accounting profit may not match your taxable profit. Your accounts may include costs in one way, while tax rules adjust or replace those costs with a different treatment.

That is why relying only on your bank balance can be risky. The bank account shows cash. It does not always show tax profit.

How accounting profit works

Accounting profit starts with income or sales.

From there, the business deducts expenses that help create, support and generate that income. These may include staff costs, materials, marketing, equipment use, customer support, supplier relationships, training and other business costs.

In accounting, this is linked to the idea of matching. You look at a time period, match the income earned in that period with the costs linked to earning it, and then arrive at profit or loss.

This helps you judge business performance. It shows whether the business model works, whether costs are under control and whether the business is moving in the right direction.

How tax profit works

Tax profit starts with business profit, but it may not end there.

Some costs that appear in the accounts may not be allowed for tax. Other costs may be treated differently for tax purposes. That means adjustments may be needed before the taxable profit figure is final.

This is where confusion often begins. A business owner may look at the profit and loss account and expect tax to follow that exact number. However, HMRC may look at certain expenses and say they need a different treatment.

In practice, this means your taxable profit can be higher or lower than your accounting profit.

Current tax guidance to check before publishing

The original episode was recorded in 2021, so the principles remain useful, but the detailed tax treatment should always be checked against current HMRC guidance.

For self-employed people, allowable business expenses can reduce taxable profit. However, not every business cost is allowable for tax. For example, client entertaining, supplier entertaining and event hospitality are generally not claimable as allowable expenses.

Training costs may be allowable when they improve or update skills used in the current business. However, training to start a new business or move into an unrelated business area may not qualify.

Equipment, cars, depreciation, capital allowances, drawings, salary and dividends all need care. The accounting treatment and the tax treatment may not be the same, and the rules can change over time.

Business entertainment and tax profit

Looking after customers and suppliers can make good business sense.

You may take a customer for lunch, meet suppliers, attend networking events, or invest time and money in keeping important relationships healthy. From a business point of view, that may feel useful and valuable.

However, tax rules may not allow those costs when calculating profit for tax. That means the cost may appear in your accounts, but it may need adding back when working out taxable profit.

The key lesson is not to stop building relationships. Instead, understand that a good business reason does not automatically create a tax deduction.

Equipment, depreciation and capital allowances

Equipment is another area where accounting profit and taxable profit can differ.

Your business may buy IT equipment, machinery, tools or other assets needed to deliver products and services. In the accounts, the cost may be spread across the expected useful life of the asset through depreciation.

Tax often works differently. Depreciation in the accounts may not be the deduction used for tax. Instead, capital allowances or cash basis rules may apply, depending on the business and the type of asset.

For example, buying equipment may support the business and help it grow. However, the way that cost appears in the accounts may not match the way it reduces taxable profit.

Cars and motor vehicles

Cars and motor vehicles need particular care.

A vehicle may be useful or necessary for the business. Even so, tax rules do not always allow a full deduction in the way business owners might expect.

The treatment can depend on the type of vehicle, how it is used, whether there is personal use, whether the business uses cash basis or traditional accounting, and which allowances or expense methods apply.

Because of this, avoid assuming that buying a vehicle gives an immediate full tax deduction. Check the current rules before making decisions.

Training and new skills

Training is valuable for business owners.

Keeping skills up to date, improving knowledge and staying current with changes in your industry can support the business. In many cases, those costs may make complete business sense.

For tax, the question is more specific. Training that improves or updates skills used in the existing business may be treated differently from training that starts a new business or moves into an unrelated area.

That distinction matters. The business may benefit from the learning, but the tax treatment depends on the purpose and connection with the current business.

Personal costs, drawings, wages and dividends

Money taken out of the business also needs careful treatment.

A sole trader may take drawings. A company director may receive salary, expenses, benefits, dividends or a director’s loan. Each route has its own accounting and tax consequences.

Dividends, for example, are not normal business running costs when calculating Corporation Tax. Salary and payroll, on the other hand, follow PAYE and National Insurance rules.

This is why business structure matters. Sole traders and limited companies do not always calculate or report profit in the same way.

Do not let tax be the only decision-maker

Tax should influence business decisions, but it should not control every decision.

Before spending money, ask whether the cost has a real business case. Does it add value? Does it support customers? Does it improve systems, skills, delivery or future opportunity?

A cost may still be worth spending even if it does not reduce tax. On the other hand, spending money only because it might reduce tax is rarely a strong business reason on its own.

Good tax planning works best when it supports good business planning.

Using profit for tax to plan your tax bill

Once you understand the difference between accounting profit and taxable profit, tax planning becomes easier.

You can set aside money more confidently. You can avoid relying only on your bank balance. You can also spot where adjustments may change the tax figure.

This links directly to budgeting for your tax bill. The earlier you understand the likely tax profit, the easier it becomes to plan cash flow and avoid surprises.

For the next step, see How to Budget for Your Tax Bill.

FAQs about profit for tax

What is profit for tax?

Profit for tax is the profit figure used to calculate tax. It may start with accounting profit, but tax rules can adjust the figure by allowing some costs, disallowing others or treating costs differently.

Is taxable profit the same as accounting profit?

No. Accounting profit shows business performance using accounting rules. Taxable profit uses tax rules, so some expenses may be adjusted before tax is calculated.

Is money in the bank the same as profit?

No. Bank cash shows how much money is available at a point in time. Profit measures income after relevant costs. A business can have cash in the bank and still have a different taxable profit figure.

Why are some business costs not allowed for tax?

Tax rules do not automatically allow every cost that appears in the accounts. Some costs may be genuine business costs but still need a different tax treatment.

Why does profit for tax matter?

It matters because tax is based on taxable profit, not simply bank cash or the profit figure a business owner expects. Understanding the difference helps with tax planning and cash flow.

Episode Timecodes

• 00:00 – Introduction to the I Hate Numbers podcast
• 00:28 – What is your profit for tax?
• 00:53 – Linking tax profit to budgeting for your tax bill
• 01:17 – Why your expected profit may differ from the tax figure
• 01:56 – Business profit versus tax authority profit
• 02:18 – What profit means in simple terms
• 02:46 – Profit as a measure of business activity
• 03:10 – Matching income and expenses
• 03:39 – Wearing the business hat and the tax hat
• 04:00 – Customer and supplier entertaining
• 05:03 – Equipment, depreciation and tax treatment
• 06:27 – Cars and motor vehicles
• 07:12 – Training costs and new skills
• 08:13 – Personal costs and business expenses
• 09:01 – Drawings, wages and dividends
• 09:42 – Why tax profit matters
• 10:06 – Business case before tax treatment
• 10:27 – Tax calculator and final thoughts

Related episodes

• What Is Profit? Gross Profit and Net Profit Explained
• How to Budget for Your Tax Bill
• Self Assessment Tax Returns

Key takeaway

Profit for tax is not always the same as accounting profit, and neither figure is the same as cash in the bank. Tax rules can treat business costs differently from the way they appear in your accounts.

Once you understand the difference, you can plan your tax bill, manage cash flow and make better spending decisions without letting tax become the only reason for action.

Plan it, Do it, Profit.

Do not let tax be the deciding factor. It can influence the decision, but it should not be the decision.

Further Support

The I Hate Numbers podcast helps business owners understand profit, tax, cash flow, bookkeeping, planning and business decisions in a practical way. We simplify business finance so you can make better decisions and feel more confident with your numbers.

If you need help understanding your taxable profit, planning your tax bill or reviewing your business accounts, you can contact us for an initial chat.

You can also use the free online business calculators to support your tax and profit planning.

For more practical finance and tax support, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

What is your profit for tax? That's a theme of this week's podcast, episode 49 of I Hate Numbers. Hi folks. My name is Mahmood. I run my own accounting firm and trading company, have done for the last 26 years, and the purpose of this podcast is part of my overall mission to improve your business mindset, for your business to make money,

for your business and you to have a good blend of lifestyle and enjoying what you're doing, serving your customers well, and building a sustainable and thriving business. In last week's podcast, we talked about how you should budget for your tax bill. I recommend you guys check it out there. Putting that money aside to pay for your future tax bill is a definite

must. There's some other tips that we shared in last week's podcast, so I recommend you check it out, and there's also a bit of a freebie in there, which I'll mention again at the end of this podcast. This week's podcast, what is your profit for tax has come out because in the course of my business, when I'm preparing tax returns, when I'm advising clients of what to do, what typically happens is the figure that they think is the profit they've made in their business doesn't tend to be the one that the taxman wants to take a slice out of. What the taxman's view of profit is not going to be the same as your business.

In this episode, we are going to explore what is the notion of profit, or actually is it for your business? How does the tax man see it differently? I'm going to showcase some examples of where there's a different view taken by the tax authorities and your own business, share some tips, and then put those into practice into your business.

So, let's crack on with the broadcast. Now, the first question is, what is profit? And it's most simple, profit is the difference between the income or the sales that your business generates, so what's the value of what you are selling, whether it's a commodity, whether it's your services, and from that, we deduct the expenses that we have in our business that helps us create that value that helps us generate and support the business.

Think of it, if you are exercising, if you want to get healthy, one measure of your health progress would be your blood pressure, perhaps your heart rate. It may be the weight that you've got. That would be a measure of activity in that context. In your business, profit is still a key measure of your business activity. In the world of numbers and accounting,

they call that matching, where you look at a time period, you look at the value of what you've created by sales, you deduct the expense of that same time period and bingo, there's your profit, or in some unfortunate cases, there might be your loss. For the taxman, what you have deducted by way of expenses may not be items that they will permit you to take into account when they work out your tax profit.

Fundamentally, what we're going to think in terms of, we've got two different hats we're wearing and two different viewpoints that we're adopting. Now, let's start from the viewpoint of your business. Now, when you put your business hat on and you want to see how your business is progressing, profit is still a very valuable measure of that progress.

We will take into account what is considered good business practice, so keeping your customers happy, keeping your suppliers on board is an absolutely vital part of that business process. So there may be monies that you are expanding on entertaining those customers, entertaining those suppliers. And I don't mean juggling or anything of that nature, even though that might be your thing,

but actually, perhaps buying them lunch, taking them out somewhere, finding out how their business is developing, and keeping it a good business relationship. You may decide to join a sports club, join some form of society where you can also potentially network and meet new potential clients as well as look after your current clients.

Now, when it comes to the taxman, when we put that hat on, in the main, in those tax jurisdictions, entertaining, if I can use that term, would not be a permitted tax deduction. Makes it sound like the tax ban is quite a mildly old thing. That may be true, but from their rules, entertaining of that nature would not be permitted.

Other areas that we might get a difference. One major area is when you have to buy equipment for your business. Typically, you'll need to invest in infrastructure, you'll need to buy IT equipment, you may need to invest in a whole range of manufacturing equipment. Those items that are necessary to support your business, the infrastructure in order you to deliver your services, that's a legitimate business expense,

but when we prepare the business accounts, we typically take in this weird and wonderful thing called depreciation. So, for example, if I buy a piece of IT equipment that typically costs me, say, 3,000 pounds, I have to say to myself, how long do I expect to use the item for, and I have to spread the cost over the lifetime expectancy of that item.

Now, that figure called depreciation is what gets taken into account in working out your business profits. Now, when we put our other hat on and we put the hat on of the tax authorities, typically, depreciation would not be allowed as a tax deductible. The tax ban is not completely wisely, by the way. They will allow you to deduct the cost of that equipment, and it's not the purpose of the podcast to explore the minutia and the different rules, but in certain situations, you are allowed to deduct the entire cost of that item against your tax bill.

That's not bad, and the policy there for the tax authorities is to encourage you to invest in that item. Another example where you might see a discrepancy when it comes to cars, motor vehicles. You may have invested in a vehicle for yourself or for your staff. You typically would not be allowed to make a complete deduction for that, for tax purposes.

There are exceptions. If it's electric, you are allowed that, but in your accounts, you'll still be spreading the cost of that item over the period of its life expectancy to your business. Let's share another example where we might see a difference in the profits that your business creates and where the tax man might wave their finger at you and say, I'm sorry guys,

you can't have that, and that might be in the area of training. Now, absolutely key in your business, if you want to sustain, there is no such thing that you know everything. Life and business is a continual learning exercise. There may be courses that you see are valuable to your business that you participate on.

There may be different areas of your business that you wish to move into, and therefore, you need to acquire that skill and knowledge. Money that you invest in training, and an absolutely critical thing, and I am slightly biased coming from an educational background, but I can still see the value of learning all the time and none of us stops learning or certainly shouldn't do.

Now, when you invest in a training course, you invest in a training product, you do that to keep up to date, you can maintain your professional expertise, or you acquire new skills, and that's perfectly allowable. For tax, however, if you are acquiring a brand new skillset, moving into an area where you didn't have that requisite, then the taxman typically would not allow it.

However, in your business, it would be permitted. It's a business expense. The last area I want to talk about is in terms of your own personal interaction with the business. Now, running a business is a wonderful thing. I, I think it's exciting, I love it, but also I recognise that it does take its toll, and therefore, what we might do occasionally is to take a respite.

We want to relax, we want to take some time off, and we might decide to unwind and we think it's a necessary business expense that we go and actually enjoy a spa, we go out, maybe take a short break. Now, that quite legitimately will be considered a business expense in your profit or loss statement, but the tax plan would wave their finger at you and say a definite no-no.

The other area that interacts is the money, the rewards that you give yourself for taking the risk, expending the effort, and running your business. We might call that drawings, we might call that wages. So, money that you withdraw from your business, depending how it's structured, you might represent that in your profit statement or not,

but for the taxman, there'll be certain specific rules that govern what will be allowed or not. One of the most obvious ones are things like dividends, which are not a tax deductible expense, even though you might see that as quite legitimate. Now, rounding this up, we've got this idea: what is your profit for tax?

Why is it important? Well, tax is a business cost. We need to make sure we put enough money aside. It's important to also recognise that the figure that we might see on our profit statement will not necessarily be the same one that the taxman takes the slice out of. It's also important to remember and focus on what you spend in your business

has to have a business case behind it. So, does it add value to your business? Does it support the business? Does it give you greater opportunity? Do not let tax be the deciding factor. It's certainly an influencing factor, but it's not the decisive one. Another thing to conclude is that money in your bank account is not the profit that you're making in your business.

And in all these things, it's key to have an understanding of how much profit your business is actually making. Okay, folks, in terms of picking up from last week as well, we've got a tax calculator that we'd love to share with you guys. Check out the show notes. There'll be a link to a free tax calculator. Whether you are self-employed, a sole trader, or a corporate entity, there'll be a tax calculation built in. Any listers from the US and outside the UK,

thank you very much for sharing your time. This is built in with UK rates, but the principle is still a good one. Hope you've got some value from the show, folks. I'd love it if you could share it amongst with your friends, colleagues, and your enemies perhaps. Give us some feedback. And in three weeks’ time, it's going to be one year since the I Hate Numbers

Podcast was launched, so episode 52. If there are topics that you want me to discuss and air and go through in future episodes, drop me a line. Until then, have a great week. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode.

We look forward to you joining us next week for another I Hate Numbers episode.