Key facts
- Gross margin measures revenue minus direct costs; net margin deducts all overheads too
- UK retail net margins typically run 2% to 6%; professional services often reach 20% to 40%
- Hospitality can show 65% gross margin but only 4% to 7% net after labour and rent
- Pricing changes often move net profit faster than chasing more revenue at thin margins
Gross margin vs net margin: the key distinction
Most profitability conversations conflate two different metrics. Understanding the difference is essential.
Gross profit margin = (Revenue minus Cost of Goods Sold) divided by Revenue, multiplied by 100
Cost of Goods Sold (COGS) includes only direct production costs: materials, direct labour, and manufacturing overhead. Gross margin measures how efficiently the business produces its goods or services.
Net profit margin = Net profit after all expenses divided by Revenue, multiplied by 100
Net profit deducts everything: COGS plus all operating expenses (rent, staff, marketing, utilities, admin, depreciation, finance costs, and tax). Net margin is the real measure of business profitability.
The gap between gross and net margin is your total overhead cost structure. A business with 60% gross margin and 8% net margin is spending 52p of every revenue pound on overheads.
Profit Margin Calculator
Calculate both gross and net margins instantly from your revenue and cost figures.
UK industry profit margin benchmarks 2026
| Industry | Typical gross margin | Typical net margin | Key margin drivers |
|---|---|---|---|
| Retail (physical) | 20% to 40% | 2% to 6% | High overheads (rent, staff, stock holding) |
| Retail (online/e-commerce) | 30% to 55% | 5% to 15% | Lower fixed costs, fulfilment costs |
| Hospitality (restaurant/cafe) | 60% to 75% | 3% to 9% | High labour and food waste |
| Construction (general) | 20% to 35% | 5% to 15% | Subcontractor costs, project risk |
| Professional services | 65% to 85% | 20% to 40% | Low COGS (mainly time), scalable |
| IT and software | 60% to 80% | 15% to 30% | High initial dev, then scalable |
| Legal services | 65% to 80% | 20% to 35% | High hourly rates, low direct costs |
| Accountancy | 65% to 80% | 20% to 35% | Recurring revenue, low COGS |
| Manufacturing | 25% to 45% | 5% to 12% | Capital intensive, tight margins |
| Wholesale | 15% to 30% | 3% to 8% | Volume dependent, logistics costs |
| Hairdressing/beauty | 50% to 70% | 10% to 20% | Labour intensive, chair rental model |
Source: ONS Business Demography, UK Small Business Finance Markets Report 2026, sector-specific trade association data.
What causes the gross-to-net margin gap in hospitality
Hospitality businesses show the most dramatic gross-to-net gap of any sector. A restaurant with 65% gross margin often reports only 4% to 7% net margin. The explanation lies in the overhead structure:
| Cost type | % of revenue (typical UK restaurant) |
|---|---|
| Food and beverage costs | 28% to 35% |
| Labour (kitchen + front of house) | 30% to 35% |
| Rent and rates | 8% to 12% |
| Utilities | 3% to 5% |
| Marketing and management | 2% to 4% |
| Waste and shrinkage | 2% to 3% |
| Insurance, repairs, licences | 1% to 2% |
| Net margin (remainder) | 3% to 9% |
This is why hospitality businesses operate under constant pressure. A small revenue drop (bad weather, a competitor opening nearby) destroys the net margin entirely because the fixed cost base remains unchanged.
How to calculate and improve your margins
Step 1: Calculate your gross margin
Revenue: £180,000 | Direct costs: £90,000
Gross profit = £90,000
Gross margin = (£90,000 / £180,000) x 100 = 50%
Step 2: Calculate your net margin
Overheads (rent £24,000, staff £36,000, marketing £9,000, utilities £6,000, other £12,000) = £87,000
Net profit = £90,000 minus £87,000 = £3,000
Net margin = (£3,000 / £180,000) x 100 = 1.7%
A 1.7% net margin on £180,000 revenue generates only £3,000 net profit. Any disruption to revenue or cost increase destroys the business's viability.
Common margin improvement levers:
| Lever | Typical impact | Notes |
|---|---|---|
| Raise prices by 5% | Gross margin increases if volume holds | Most businesses underprice |
| Reduce direct costs by 10% | Gross margin increases proportionally | Renegotiate suppliers |
| Cut one overhead category | Net margin improves directly | Identify biggest non-essential overhead |
| Improve capacity utilisation | Fixed cost spread over more revenue | Common in professional services |
| Remove lowest-margin product/service lines | Average margin improves | Counterintuitive but often powerful |
Expert Tip
Most small businesses focus on revenue growth as the primary lever for improving profit. Pricing is often more powerful. A 5% price increase on £180,000 revenue with stable costs adds £9,000 to gross profit and approximately £7,200 to net profit (after a small volume reduction). Achieving the same £7,200 extra net profit through revenue growth alone would require approximately £420,000 in additional revenue at a 1.7% net margin. Pricing leverage is far more efficient than volume growth at thin margins.Why "good margin" depends on your business model
A software-as-a-service (SaaS) business with 75% gross margin and 5% net margin is struggling with overhead. A well-run trade business with 30% gross margin and 18% net margin is highly profitable. The absolute percentage matters less than the trajectory and how it compares to your sector.
The question to ask: is your net margin sufficient to:
- Pay you and your team fairly without affecting profit measurement
- Service any business debt
- Invest in growth (marketing, equipment, hiring)
- Build a cash reserve
- Provide an acceptable return on your capital and risk
If yes, your margin is good enough. If any of these are being compromised, margin improvement is the priority.
Corporation tax and profit margin
For a limited company, corporation tax at 19% to 25% applies to net profit. This means your post-tax margin is 81% to 75% of your pre-tax net margin. A business with 15% pre-tax net margin has approximately 11% to 12% post-tax margin after corporation tax at 19%. See the Corporation Tax Calculator to calculate your exact liability.
Official sources
- ONS: Business Demography UK
- British Business Bank: Small Business Finance Markets Report 2026
Related Calculators
Frequently Asked Questions
It depends entirely on the industry. In professional services (consultancy, legal, accountancy), 20% to 35% net margin is typical. In retail, 2% to 6% is normal. In construction, 5% to 15% is considered healthy. Compare your margin against industry averages rather than a universal benchmark.
Gross profit deducts only direct production costs (materials, direct labour) from revenue. Net profit deducts all business costs including overheads (rent, admin, utilities, marketing, depreciation). Net profit is the true measure of business profitability.
High gross margins (60% to 75%) are eroded by very high operating costs, particularly labour (30% to 35% of revenue), rent, waste, and utilities. The fixed cost base means small revenue drops directly destroy net margin.
The most effective levers are: pricing increases (often underused), reducing direct costs through supplier renegotiation, eliminating the lowest-margin service lines, and improving capacity utilisation to spread fixed costs over more revenue.
Service businesses (minimal direct costs, mainly time-based) should target gross margins of 60% to 80%. Below 50% suggests either poor pricing or excessive subcontracting costs that have not been passed through fully to clients.
No. Profit margins are always calculated on revenue and costs exclusive of VAT. VAT collected from customers and paid to HMRC is not your income or expense; it passes through the business.
The margin at which your business covers all costs with zero profit. If fixed costs are £100,000 and gross margin is 50%, you need £200,000 in revenue to break even.
Gross margin equals (revenue minus direct costs) divided by revenue, times 100. Net margin equals (revenue minus all costs) divided by revenue, times 100. For example, £30,000 net profit on £200,000 revenue is a 15% net margin.
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James Hartley is a Chartered Management Accountant (CIMA) with more than eight years of experience in UK tax, payroll and compliance. He holds a BSc in Finance and Economics from the University of Manchester and spent his early career at a Big 4 accounting firm. He founded WhatsUK to build free UK financial calculators and guides verified against official HMRC sources. He authors every calculator and article on WhatsUK.
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Disclaimer: This calculator provides estimates based on standard HMRC rates for 2026/27. Results may vary based on individual circumstances. This is not financial advice. Always consult a qualified accountant or CIMA-qualified financial adviser for personal tax matters.