Selling Online: A Guide To Paying Income Tax

If you use sites such as eBay and Depop to sell personal items for profit, you may be walking an Income Tax tightrope. There’s a grey area in paying tax as an online seller, and that…

5 Minute Read

Last Updated: 13th February 2024

If you use sites such as eBay and Depop to sell personal items for profit, you may be walking an Income Tax tightrope. There’s a grey area in paying tax as an online seller, and that grey area relates to the level of income you’re making from online sales.

For most people, online shopping sites act as an opportunity to sell a few items they no longer use – as opposed to being a secret small business. But HMRC determines your filing status through your earnings and your intentions.

What’s more, if they find that you’ve been making additional taxable income without disclosing it, you’re likely to be penalised. Discover how to avoid this in our guide to paying tax as an online seller.

What is considered ‘trading’?

Trading is defined by the action of buying and selling goods. Obviously, online sellers fall into this category – but, due to the fact that they are usually selling their own personal items at a reduction in price, there’s often no reason for them to engage the Income Tax system. For this reason, HMRC created a tax-exempt trading allowance of up to £1,000.

For the majority of sellers, staying within HMRC’s allocated allowance won’t be a problem. However, for those of you that are earning additional income over £1,000, you will be expected to declare it and pay taxes on it.

What do I need to do if I am trading?

Trading beyond the allowance means that you will need to register for a Self Assessment tax return. This is the process through which HMRC places you in the necessary tax bracket and determines your personal Income Tax, as well as any relevant tax credits you may be owed. This will need to be filed by 31st January or you may face a penalty.

If you are already in the process of filing a tax return for the purposes of self-employment, then your trading income will simply need to be added to your total income. If you aren’t, you must first register so that HMRC can combine this with your PAYE earnings (if any) and apply the correct tax rates.

Before you can register, you’ll need your Unique Taxpayer Reference (UTR) number. As this can take up to ten days to arrive, be sure to register as soon as you recognise that you’re trading. By doing so, you’ll allow yourself enough time to register and file ahead of the deadline.

What taxes do I need to register for?

You won’t need to register for any specific taxes upon registering for Self Assessment. Provided you clearly identify your income on your tax return, then the tax from your internet sales should be automatically applied.

There are other tax forms and supplementary pages you may need to file alongside your main Self Assessment tax return if you earn additional income from other sources. These include the profit you make from rental properties or any partnerships you’re involved in.

What am I paying tax on?

You’re paying tax on the income that exceeds your personal trading allowance. As such, any profits made from the sales transactions you make will be taxed. These deductions will take the form of a tax bill you’ll receive after filing your Self Assessment tax return.

You can file your Self Assessment tax return anytime before 31st January. In fact, by starting the process early, you’ll increase the amount of time you have to review your tax return and potentially lower your tax bill.

While a number of online sellers are savvy to their tax obligations, they often forget to take advantage of the extensive forms of tax exemption that are available to those who work for themselves.

For example, you may want to invest in stationery or office equipment to use purely for business purposes. These purchases can be claimed back on – they are known as allowable expenses. By including them in your Self Assessment tax return, you can reduce your tax liability.

Do I need to keep records?

Yes, for two reasons. Firstly, because keeping records is essential if you want to stay compliant with HMRC. If they ever conduct an investigation into your finances, you will need to provide them with all the relevant invoices, receipts and bank statements.

The second reason is that it ensures your Self Assessment tax return is accurate in the first place. By keeping records (or logging all income and expenditure when you receive or make them), you’ll be able to input the correct figures on your tax forms.

So, to ensure your Self Assessment tax return is compliant, that you’re paying the right amount of Income Tax as an online seller, and that you maximise your take-home pay , follow these five steps:

  • Register for Self Assessment as soon as you exceed your personal trading allowance
  • Log your income and expenses as you go
  • Start completing your tax return early so that you can see opportunities to reduce liability
  • Claim expenses related to online selling (stationery, postage, etc.)
  • Use tax software to ensure you don’t make any mistakes

How GoSimpleTax can help

With our free trial alone, you can start inputting your income as you earn it, and get a clear overview of your obligations. Our intuitive software highlights areas where you’re able to claim expenses, and our app allows you to stay plugged in from wherever you are.

When you’re ready, all you need to do is upgrade your trial to a full account and you can submit your completed Self Assessment tax return directly to HMRC. There’s no hassle or hidden fees with our award-winning platform.

So, what’s stopping you? Sign up for a free trial today and experience filing made simple.

Read our relevant Do i have to pay tax as an online seller? guidelines and boundaries online

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Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.

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