Profit Margin Calculator: Work Out Gross & Net Margin

Quick answer

Profit margin = profit ÷ revenue × 100. Selling at £100 what costs £60 gives a 40% margin. Do not confuse it with markup, which divides by cost instead: the same sale is a 66.7% markup. Mixing the two up is the most common pricing mistake small businesses make.

Use the profit margin calculator above

Pop your figures into the calculator above: the cost of the product or service, and the price you sell it for. It returns your gross profit in pounds and your profit margin as a percentage. If you add overheads and tax, it can also show your net margin, which is the number that really tells you whether the business is healthy.

What profit margin actually means

Profit margin is the share of your selling price that is left over as profit once costs are taken out. It is always expressed as a percentage of the selling price, not of the cost. That single detail catches a lot of people out, and it is the reason margin and markup give different numbers from the same figures.

Say you sell a handmade candle for £20 and it costs you £8 to make. Your gross profit is £12. As a margin, that £12 is measured against the £20 selling price, so your gross profit margin is 60%. The higher the percentage, the more of each sale you keep before overheads and tax.

Margin matters because it tells you how much room you have. A business running on a 10% margin has almost no cushion: a small rise in supplier costs or a discount to win a sale can wipe out the profit entirely. A business on a 50% margin can absorb shocks, fund growth, and still pay the owner.

Gross profit margin vs net profit margin

There are two margins worth knowing, and they answer different questions.

Gross profit margin looks only at the direct cost of what you sell, the cost of goods sold. For a maker, that is materials and the labour that goes straight into the product. For a reseller, it is the wholesale price you paid. Gross margin tells you whether your core pricing works.

Net profit margin takes everything off: direct costs, plus rent, software, insurance, marketing, your accountant, bank charges, and tax. It is the bottom line. A shop can have a healthy 55% gross margin and still make a loss if rent and staff swallow the rest. Net margin is the figure your accountant cares about and the one that decides whether you can pay yourself.

A quick way to remember it

• Gross margin = profit after the cost of the thing itself.
• Net margin = profit after everything, including overheads and tax.

Most small businesses track gross margin per product and net margin for the whole business across a month or year.

The profit margin formula

The formula behind this profit margin calculator is short, and it is worth knowing by heart so you can sanity-check any quote on the spot.

Gross profit margin (%) = (Selling price − Cost) ÷ Selling price × 100

For net margin, you swap the simple cost for total costs:

Net profit margin (%) = (Selling price − Total costs) ÷ Selling price × 100

Or, if you are working from your accounts across a whole year:

Net profit margin (%) = Net profit ÷ Total revenue × 100

The key is that you always divide by revenue (the selling price or total sales), never by cost. Dividing by cost gives you markup, which is a different number, and we will come back to that below.

Worked example: a freelancer and a candle maker

Here are two scenarios worked through step by step, the same way the calculator does it.

Example 1: Priya the candle maker

Priya sells a candle for £20. Wax, wick, jar and fragrance cost her £8.

• Gross profit = £20 − £8 = £12
• Gross profit margin = £12 ÷ £20 × 100 = 60%

Now bring in her overheads. Across a typical month she sells 200 candles for £4,000 of revenue. Materials cost £1,600. On top of that she pays £600 for a market stall, £150 for packaging and postage supplies, £100 for her website and card fees, and she sets aside £350 for tax. Her total costs are £2,800.

• Net profit = £4,000 − £2,800 = £1,200
• Net profit margin = £1,200 ÷ £4,000 × 100 = 30%

So her core pricing is strong at a 60% gross margin, but after the cost of actually running the business she keeps 30%. That is the number she should use when planning a price rise or deciding whether a discount is affordable.

Example 2: Tom the freelance designer landing a £5,000 project

Tom quotes £5,000 for a branding project. He pays a £700 illustrator to help, £90 for stock fonts and assets, and reckons his software and admin time on the job are worth about £210. His direct costs come to £1,000.

• Gross profit = £5,000 − £1,000 = £4,000
• Gross profit margin = £4,000 ÷ £5,000 × 100 = 80%

Service businesses often show high gross margins because their direct costs are low. The catch is that the net margin is where unpaid hours, dead time between projects, and tax all land, so the gap between gross and net can be large for freelancers.

Margin vs markup: the difference that costs people money

This is the single most common mix-up in pricing. Margin and markup use the same two numbers but divide by different things.

• Margin = profit as a percentage of the selling price.
• Markup = profit as a percentage of the cost.

Take Priya's candle again: £8 cost, £20 price, £12 profit. The margin is £12 ÷ £20 = 60%. The markup is £12 ÷ £8 = 150%. Same candle, very different percentages.

The danger is applying a margin target as if it were a markup. If you want a 40% margin and you simply add 40% to your cost, you will fall short, because adding 40% to cost only gives you a 28.6% margin. To hit a 40% margin you actually need to mark cost up by about 67%. If you are pricing from cost, use our markup calculator to convert a target margin into the right markup; if you are pricing from a selling price, stay here.

What counts as a good profit margin in the UK

There is no single right answer, because margins vary enormously by sector. A supermarket runs on thin net margins and makes money on volume; a software business can run on very high margins. As a rough rule of thumb that many UK small businesses use:

• A net profit margin under 5% is tight and leaves little room for error.
• Around 10% is generally seen as healthy for many trades and retailers.
• 20% or more is strong, and common in services and digital products.

Treat these as orientation, not a target handed down from above. The better test is whether your margin is improving over time and whether it covers your costs, your tax, and a fair wage for you. Compare yourself against last quarter and against others in your specific trade rather than against a generic benchmark.

How to improve your profit margin

You can lift a margin from either end: charge more, or spend less. Both work, and the calculator makes it easy to test a change before you commit.

• Raise prices deliberately, not apologetically. A small increase often barely dents sales but flows almost entirely to profit. Model a 5% price rise in the calculator and watch the margin jump.
• Cut the cost of goods, not the quality. Buy in larger quantities, switch suppliers, or remove a feature customers do not value.
• Trim overheads that do not earn their keep. Unused subscriptions, expensive payment processing and over-ordered stock quietly erode net margin.
• Reclaim VAT where you can. If you are VAT registered, you charge VAT on sales and reclaim it on eligible purchases, so VAT should not sit inside your margin maths. Always run your margin on the VAT-exclusive figures. Our VAT calculator helps you strip VAT out before you work out the margin.
• Know your break-even point. Margin tells you the profit on each sale; break-even tells you how many sales cover your fixed costs. Pair this tool with our break-even calculator to see how many units you must shift before you are in profit.

VAT, tax and the figures you feed in

Two UK-specific points are worth getting right, because they quietly distort margins.

First, VAT. If you are VAT registered, the VAT you charge is not yours to keep, so never include it in your selling price when calculating margin. Use the net, VAT-exclusive price. A 20% standard VAT rate added to a £20 net price makes the customer pay £24, but your margin is still based on the £20. Mixing the two inflates your apparent margin and leads to underpricing.

Second, tax on profit. Net margin should ideally account for the tax you will owe on the profit. A sole trader pays Income Tax and Class 4 National Insurance on profits; a limited company pays Corporation Tax. If you trade through a company, you can estimate that liability with our corporation tax calculator and feed it into your total costs. For the percentages and quick pricing checks behind all of this, the percentage calculator is handy when you want to apply or reverse a percentage change.

For the official rules on VAT and how registration affects your pricing, see VAT for businesses on gov.uk and the current VAT rates.

Common mistakes to watch for

• Confusing margin with markup. The biggest one. If your percentage looks suspiciously high, you have probably divided by cost instead of selling price.
• Leaving VAT in the price. Calculating margin on a VAT-inclusive figure overstates profit. Strip the VAT first if you are registered.
• Forgetting your own time. Freelancers and makers often ignore the hours they put in. If you do not cost your labour, your real margin is lower than it looks.
• Treating gross margin as take-home. Gross margin ignores rent, software, fees and tax. Always check net margin before deciding you can afford a discount or a pay rise.
• Discounting without doing the maths. A 20% discount on a product with a 30% margin leaves you almost no profit. Run the new price through the calculator before you offer it.
• Ignoring tax on profit. Profit is taxed. A 30% net margin shrinks once Income Tax and National Insurance, or Corporation Tax, are paid.

These figures are estimates for guidance only and are not personal tax or financial advice. For decisions that affect your tax position, check the current rules on gov.uk or speak to an accountant.

Who should use this calculator

This works out margin from a price you already have — the opposite direction to the markup calculator. Margin is profit as a percentage of the selling price, which is the figure that matters when you are assessing whether a business is viable, because it tells you what proportion of every pound of revenue you keep.

It also works backwards: enter a target margin and it gives the price needed to hit it. That is the practical use for anyone whose costs have risen and who needs to know how much to increase prices by to stand still — which is always more than the cost increase itself.

What this calculator assumes

• Margin = profit ÷ selling price, whereas markup divides by cost. The two are different numbers for the same transaction.
• Gross margin uses the direct cost of goods; net margin also deducts the other costs you enter.
• Where the VAT-inclusive option is used, VAT is stripped out before margin is calculated — VAT is never yours.
• Unit figures are multiplied by units sold to give totals.

Limitations — what it does not cover

• The full overhead base. Unless every fixed cost is entered, net margin will be overstated.
• Payment processing fees of 1.5–3%, which come straight off the margin.
• Returns, refunds and shrinkage.
• Discounting, which reduces realised margin below list margin.
• Stock holding costs and the cash tied up in inventory.
• Corporation Tax or Income Tax on the profit that remains.

Related calculators

Carry on pricing and planning with these tools: convert a cost into a price with the markup calculator, find out how many sales cover your fixed costs with the break-even calculator, and handle VAT correctly with the VAT calculator.

Margin vs markup: same sale, different numbers

Margins feed straight into your tax: work profits through the self-employed tax calculator or corporation tax calculator, and check break-even before cutting prices.