Key takeaways
- A profit and loss account runs from turnover, less cost of sales, to gross profit, less overheads, to net profit.
- In our worked example, turnover of £180,000 gives gross profit of £108,000 and profit before tax of £45,000, a 25% margin.
- Every UK limited company's statutory accounts must include a profit and loss account, a balance sheet and notes.
- Small companies can still fillet the profit and loss account out of the accounts they file at Companies House; the plan to require it from April 2028 was paused on 23 October 2026.
- Corporation Tax is 19% on profits up to £50,000 and 25% above £250,000, with marginal relief in between.
- Sole traders can use the cash basis; limited companies cannot and must record income when it is earned.
- Self-employed records must be kept for at least 5 years after the 31 January filing deadline.
A profit and loss account (P&L) shows what a business earned and spent over a period, and the profit or loss left at the end. The basic layout is turnover, less cost of sales, gives gross profit; less overheads gives operating profit; less interest and tax gives profit for the year. Below is a template you can copy and a worked example for a small UK company.
What a profit and loss account shows
A P&L measures performance over a period, usually a 12-month accounting year. GOV.UK’s annual accounts guide describes it as showing “the company’s sales, running costs” and the profit or loss for the year. A balance sheet, by contrast, is a snapshot of what the business owns and owes on one date. See how to read a balance sheet.
The profit and loss template
Copy this layout into a spreadsheet. Each line is a total of the items under it.
| Line | How to work it out |
|---|---|
| Turnover (sales) | All sales in the period, excluding VAT if registered |
| Less: cost of sales | Stock, materials, direct labour, subcontractors |
| Gross profit | Turnover minus cost of sales |
| Less: overheads | Staff, premises, office, marketing, professional fees, travel, depreciation |
| Operating profit | Gross profit minus overheads |
| Less: interest | Loan and overdraft interest |
| Profit before tax | Operating profit minus interest |
| Less: Corporation Tax | Companies only |
| Profit for the year | Profit before tax minus tax |
Use one column per period, such as this year and last year, so you can compare. For monthly management accounts, use 12 columns and a total.
Which expense lines to use
Group overheads using the same headings HMRC uses for allowable expenses. That makes tax returns easier.
- Office costs: stationery, phone, internet, postage, software
- Premises: rent, business rates, utilities, insurance
- Travel and vehicles: fuel, insurance, parking, fares, hotels
- Staff costs: salaries, employer’s National Insurance, pensions, agency fees
- Legal and financial: accountancy, bank charges, professional indemnity insurance
- Marketing: advertising, website costs
- Subscriptions and training: professional bodies, trade journals, courses
Keep client entertainment on its own line, because it is not allowable for tax. See sole trader expenses for what HMRC allows.
Worked example: a small limited company
Harbour Joinery Ltd is a fictional joinery company with a year ending 31 March 2026.
| Line | £ |
|---|---|
| Turnover | 180,000 |
| Materials | (54,000) |
| Direct labour | (18,000) |
| Gross profit | 108,000 |
| Salaries | (30,000) |
| Rent and rates | (12,000) |
| Insurance | (2,400) |
| Software and phone | (3,600) |
| Marketing | (4,000) |
| Accountancy | (2,500) |
| Motor and travel | (3,500) |
| Depreciation | (4,000) |
| Operating profit | 46,000 |
| Loan interest | (1,000) |
| Profit before tax | 45,000 |
| Corporation Tax at 19% | (8,550) |
| Profit for the year | 36,450 |
Brackets show amounts taken away. Overheads total £62,000.
What the example tells you
The ratios are where a P&L earns its keep.
- Gross margin: £108,000 ÷ £180,000 = 60%. For every £1 of sales, 60p is left after direct costs.
- Net margin before tax: £45,000 ÷ £180,000 = 25%.
- Overheads as a share of sales: £62,000 ÷ £180,000 = 34%.
Use the profit margin calculator to run these on your own figures, and the breakeven calculator to see the sales you need to cover overheads.
A note on the tax line
The example applies the 19% small profits rate, which GOV.UK’s Corporation Tax rates page gives for profits of £50,000 or less. The main rate is 25% above £250,000, with marginal relief between. In practice taxable profit differs from accounting profit. Depreciation is added back and capital allowances are claimed instead, so treat the tax line as an estimate.
A sole trader’s P&L stops at profit before tax. Income Tax and National Insurance are worked out on the owner’s tax return. See sole trader tax.
Cash basis or accruals?
Limited companies record income when it is earned and costs when they are incurred, not when cash moves. Sole traders can use the cash basis, which records income “when you receive money” and expenses when you pay. GOV.UK says some businesses, such as limited companies, cannot use it. If you choose traditional accounting as a sole trader, you must say so on your return.
Do you have to file your P&L?
Every limited company’s statutory accounts must include a P&L, a balance sheet and notes, and they go to HMRC with the Company Tax Return. At Companies House, small companies can file abridged accounts and leave out (“fillet”) the P&L.
On 23 October 2026 Companies House announced that the plan to make small companies and micro-entities file their P&L from April 2028 is paused. Software-only iXBRL filing still starts in April 2028. See P&L filing paused.
Checklist before you finalise
- Turnover matches your sales records and excludes VAT
- Every supplier invoice for the period is in, including unpaid ones (accruals basis)
- Stock is counted at the year end
- Depreciation is charged on fixed assets
- Entertainment and other disallowable costs are on separate lines
- Records are kept for at least 5 years after the 31 January deadline (sole traders), as GOV.UK’s records guide requires
Frequently asked questions
What is the format of a profit and loss account?
Turnover, less cost of sales, gives gross profit. Less overheads gives operating profit, and less interest and tax gives profit for the year.
What is the difference between gross profit and net profit?
Gross profit is sales minus direct costs such as materials. Net profit is what remains after overheads, interest and, for companies, tax are also deducted.
Do small companies have to file a profit and loss account at Companies House?
No. Small companies can fillet it out of the accounts they file. The plan to require it from April 2028 was paused on 23 October 2026.
Does a sole trader need a profit and loss account?
There is no set format, but a sole trader needs the same figures to complete the self-employment pages of the tax return. A simple P&L is the easiest way to keep them.
How often should I prepare a P&L?
At least once a year for your accounts. Monthly or quarterly P&Ls help you spot problems early.
Sources
Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance on 6 November 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.
- Prepare annual accounts for a private limited company (GOV.UK)
- Expenses if you're self-employed (GOV.UK)
- Cash basis (GOV.UK)
- Corporation Tax rates and reliefs (GOV.UK)
- Companies House update to accounts filing from April 2028 (Companies House, 23 October 2026)
- Business records if you're self-employed (GOV.UK)