Profit before tax: what it is, how to work it out, and the tax on it

Short answer: profit before tax (PBT, also called pre-tax profit or net profit before tax) is what a business earns after every cost, including wages, rent, depreciation and interest, but before income tax or corporation tax. The formula is sales − cost of sales − overheads − interest paid + interest received, or operating profit − net interest. It is the line a company’s tax is worked out from, after a few adjustments. For most small companies the tax is about a quarter of it: 19% to 25% in the UK, 25% for most small Australian companies, 28% in New Zealand. In Xero, the Net Profit line during the year is usually profit before tax, because the tax is only posted at the year end. A worked example for each country is below.

Where profit before tax sits

Line	How to get it	What it tells you
Gross profit	Sales − cost of sales	Whether each sale makes money
Operating profit	Gross profit − overheads (including depreciation)	Whether the business itself makes money
Profit before tax	Operating profit − interest paid + interest received, ± one-off items	What the owners earned before the tax bill
Profit after tax (net profit)	Profit before tax − income tax or corporation tax	What is left for dividends or to keep in the business

Operating profit and profit before tax differ only by the cost of borrowing and anything unusual, such as a gain on selling a vehicle. A business with no loans and no one-offs has the same figure for both. Operating profit covers the line above in detail, and gross profit vs net profit the margins at each level.

A worked example: an electrical contractor in Brisbane

These figures are made up. Spark Line Pty Ltd has aggregated turnover well under $50 million and almost all its income is from trading, so it is a base rate entity taxed at 25%. Year to 30 June 2026:

Profit and Loss	$
Sales	1,200,000
Cost of sales (materials, subcontractors)	(720,000)
Gross profit	480,000
Overheads, including directors’ salaries and $40,000 of depreciation	(330,000)
Operating profit	150,000
Interest on an equipment loan	(12,000)
Interest received on the tax savings account	2,000
Profit before tax	140,000

The profit before tax margin is 140,000 ÷ 1,200,000 = 11.7% of sales. Directors’ salaries are a cost of the company, so they sit above this line. Dividends are not: they are paid out of profit after tax.

From profit before tax to the tax bill

Tax is charged on taxable profit, which starts from profit before tax and adjusts for costs the tax rules treat differently. Here the only difference is $3,000 of client entertainment, which is not deductible. To keep the example simple, tax depreciation is assumed to equal the $40,000 in the accounts; in real accounts it often differs.

• Taxable profit: 140,000 + 3,000 = $143,000
• Company tax at 25%: 143,000 × 25% = $35,750
• Profit after tax: 140,000 − 35,750 = $104,250

The tax is 25.5% of profit before tax, slightly above the 25% rate, because of the cost the tax rules ignore. Profit after tax of $104,250 is the most the company could pay as dividends from this year’s profit without drawing on earlier years’ retained earnings.

The same company in the UK and New Zealand

Take the same profit before tax of 140,000 and taxable profit of 143,000 in pounds or New Zealand dollars:

	UK limited company	New Zealand company
Rate	19% up to £50,000, 25% above £250,000, marginal relief in between	28% flat
Working	143,000 × 25% = 35,750, less marginal relief (250,000 − 143,000) × 3/200 = 1,605	143,000 × 28%
Tax	£34,145	NZ$40,040
Share of taxable profit	23.9%	28.0%
Profit after tax	£105,855	NZ$99,960

UK client entertainment is not allowable for corporation tax either, so the add-back is the same. Between £50,000 and £250,000, marginal relief means each extra pound of profit costs 26.5p in tax, more than the 25% main rate. If the company has associated companies (another company under the same control), the £50,000 and £250,000 limits are shared between them, so the tax can be higher than this table. The corporation tax calculator works out the bill, marginal relief and the monthly amount to put aside from your own profit figure.

The monthly tax pot

The tax is a cost of this year’s profit, but it is paid later, so the cash sits in the bank looking spare. Putting a twelfth aside each month avoids the surprise:

• Australia: 35,750 ÷ 12 = about $2,980 a month
• UK: 34,145 ÷ 12 = about £2,845 a month

An extra $10,000 of profit before tax adds about $2,500 of tax in Australia, £2,650 in the UK (inside the marginal relief band) and NZ$2,800 in New Zealand. How much to set aside for tax covers the pot for GST or VAT and sole traders too, and where to keep it.

When the tax is paid

• Australia: most companies pay PAYG instalments during the year (quarterly for most small companies), worked out by the ATO from the last return or as a rate on income (how PAYG instalments are calculated). The balance, or a refund, follows the company return; the due date depends on the company’s size and whether a tax agent lodges it.
• UK: corporation tax for a company with taxable profits under £1.5 million is due 9 months and 1 day after the year end, so 1 January 2027 for a 31 March 2026 year end. Larger companies pay in quarterly instalments.
• New Zealand: if last year’s residual income tax was over $5,000, Inland Revenue expects provisional tax during the year, usually in three instalments under the standard method, with any balance as terminal tax after the year end. Provisional tax in NZ has the dates and a worked example.

Rates and thresholds change, so check them with your accountant or the tax office for the year you are working on.

Sole traders: profit before tax is net profit

A sole trader’s business does not pay tax itself. The net profit in the accounts is the profit before tax, and the owner pays personal income tax on it (and in the UK, Class 4 National Insurance), after their own adjustments. Drawings are not a cost and do not lower it. Trading profit works through a UK sole trader from Xero’s net profit to the tax bill, and how much can I pay myself? shows how to leave the tax money in the bank. A UK sole trader or landlord with turnover over £50,000 also now has to report that profit to HMRC quarterly rather than once a year: Making Tax Digital for Income Tax covers who it applies to and the dates.

Where to find it in Xero

1. Run Reporting › Profit and Loss (Accounting › Reports in Xero’s older menu) for the period.
2. During the year, Net Profit at the bottom is usually your profit before tax: Xero’s standard layout includes interest with the other expenses, and the income tax expense is normally only posted by your accountant at the year end.
3. If an income tax expense account already has entries in the period (for example after the year-end journal), take it off: profit before tax = Net Profit + income tax expense.
4. For operating profit as well, add the interest paid back to profit before tax and take off interest received. The free net profit calculator shows each level of profit from figures you type in.
5. To compare years, add the previous year as a comparison column. If your accountant has set up a custom report layout, it may already have a “profit before tax” subtotal.

Menu names and labels change between Xero releases and regions, so search Xero Central for the report name if your screen differs.

Common mistakes

• Planning dividends from profit before tax. The tax comes out first. Spark Line has $140,000 before tax but only $104,250 after it.
• Spending the tax pot. The tax for a year is paid months after the profit was earned. Money left in the main account gets used for stock, wages or a new van. If it has already gone, can’t pay your tax bill on time? covers payment plans in each country.
• Treating the tax rate as the share of profit. Non-deductible costs, depreciation rules and losses from earlier years all change taxable profit. A loss carried forward can wipe out the tax for a year; the net operating loss guide covers how.
• Counting GST or VAT as profit. Sales and costs in the Profit and Loss are net of GST or VAT. The tax collected for the government is not income, and paying it is not an expense.
• Reading Net Profit after the year-end journal as before tax. Once the accountant has posted the tax, Net Profit is after tax. Check for an income tax expense line.

Common questions

What is profit before tax? It is what a business earns after all its costs, including wages, rent, depreciation and interest, but before income tax or corporation tax. It is also called pre-tax profit, PBT or net profit before tax.

How do you calculate profit before tax? Take sales, subtract cost of sales and overheads to get operating profit, then subtract interest paid and add interest received. Starting from profit after tax, add the income tax or corporation tax back.

Is profit before tax the same as operating profit? Not always. Operating profit is before interest. Profit before tax is after interest and any one-off gains or losses. A business with no borrowing, no interest received and no one-offs has the same figure for both.

Is profit before tax the same as net profit? For a sole trader, yes: the business does not pay tax itself. For a company, net profit usually means profit after tax. In Xero during the year, the Net Profit line is usually before tax, because the tax is posted at the year end.

How much tax does a company pay on its profit? It depends on the country and the taxable profit. In the UK it is 19% up to 50,000 pounds of profit, 25% above 250,000 pounds and between the two with marginal relief. In Australia it is 25% for a base rate entity and 30% otherwise. In New Zealand it is 28%.

Why is the tax not exactly the tax rate times profit before tax? Because tax is charged on taxable profit, not on the accounts profit. Costs such as client entertainment are added back, tax depreciation can differ from the accounts, and losses from earlier years can be deducted.

Know your profit before the tax bill does

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