How to use the profit margin calculator
- Type your selling price and your cost.
- If you are VAT registered and your price includes VAT, tick "my price includes VAT".
- Choose the VAT rate on your sales: 20%, 5% or 0%.
- Read the gross profit, profit margin and markup.
Why VAT has to come out before you work out margin
If you are VAT registered, the VAT in your price belongs to HMRC. You collect it and pay it over, so it is not part of your takings. Working out margin on a VAT-inclusive price makes you look more profitable than you are.
Example: you sell a candle for £30 including 20% VAT and it costs you £15 to make, with no VAT on the cost. Your real price is £30 / 1.2 = £25. Profit is £25 - £15 = £10, a 40% margin and a 66.7% markup.
Using the £30 by mistake gives £15 profit and a 50% margin. That 10-point gap is enough to make a price look healthy when it is not.
If you are not VAT registered
Leave the VAT box unticked. You do not charge VAT, so the whole selling price is yours. You also cannot reclaim VAT on what you buy, so your cost should be the full amount you paid, VAT included. A £12 supply bought at £14.40 including VAT is a £14.40 cost to you.
If you are VAT registered and reclaim VAT on purchases, enter your costs without VAT.
Gross profit margin vs net profit margin
This calculator gives gross profit: selling price minus the direct cost of what you sold. Net profit goes further and takes off overheads such as rent, wages, software and insurance, then divides by revenue.
A café might make a 70% gross margin on a coffee and a much smaller net margin once staff and rent are paid. Both numbers are useful. Gross margin tells you if each sale is priced well; net margin tells you whether the business as a whole makes money.
Questions people ask
What is the profit margin formula?
Profit margin = (selling price - cost) / selling price x 100. Selling at £80 with a £52 cost gives a £28 profit and a 35% margin.
Should profit margin include VAT?
Not if you are VAT registered. Take VAT off your selling price and use costs without VAT, since you pass the VAT you charge to HMRC and reclaim the VAT you pay.
What is the difference between profit and profit margin?
Profit is a pound amount, such as £10 a sale. Profit margin is that profit as a percentage of the selling price, such as 40%.
Can profit margin be negative?
Yes. If your cost is higher than your selling price you are making a loss on each sale, and the margin shows as a minus figure.