If you occasionally use a website like eBay or Gumtree to sell items you no longer want, it’s unlikely you’ll have to pay tax on the money you make from doing this.
However, if you become more serious about selling online, things start to get a bit more complicated.
When selling speciality items on online stores such as Etsy, you need to understand what tax you have to pay – especially if it’s your main source of income.
Tax is never an easy topic to wrap your head around, so we’ve written this guide which aims to make things clearer.
If you’re running a business on Etsy, chances are you’ll have to pay tax on your net profit (your total income minus your business expenses), whereas if you use the site as a hobby it’s less likely you’ll have to.
However, whether you pay tax on your Etsy sales all depends on how much money you make, because you can earn up to £12,570 without paying income tax. You also have a trading allowance, which means you can earn up to £1,000 tax-free on top of this for selling on sites like Etsy.
In this article, we’ll go through what the different types of tax are, how much you can expect to pay and which business expenses you can claim for.
What types of tax do you need to pay?
The good news is that if you’re employed but you sell on Etsy on the side, you’ll be covered by the trading allowance, which means you can earn up to £1,000 (in sales, not profit) in addition to your salaried income without paying tax. You’ll then be taxed on anything you make over £1,000.
If you’re self-employed and selling on Etsy is your main source of income, you’re taxed the same as you are with any other income. You’ll need to register with HMRC and file a self-assessment tax return (we give details on how to do this below).
Every working person in the UK can earn up to a certain amount without paying Income Tax. This is called the personal allowance.
As part of the Budget announcement, each year the Chancellor of the Exchequer reveals what this amount will be. For the tax year 2021/22, the figure is £12,570.
If you earn more than this, you have to pay Income Tax on the amount that’s above this figure – even if your earnings come from sources other than employment.
How much Income Tax do you have to pay?
For an indication of the amount of Income Tax you might have to pay, here are the current UK tax brackets:
Tax brackets for England, Wales and Northern Ireland
|Less than £12,570||0%|
|Less than £100,000||20% on earnings between £12,571 and £50,270|
|£50,271 to £150,000||40% on earnings between £50,271 and £150,000|
|£150,001 and above||45% on earnings over £150,001|
Tax brackets for Scotland
|Less than £12,570||0%|
|£12,571 to £14,667||19% on earnings between £12,571 and £14,667|
|£14,668 to £25,296||20% on earnings between £14,668 and £25,296|
|£25,297 to £43,662||21% on earnings between £25,297 and £43,662|
|£43,663 to £150,000||41% on earnings between £43,663 and £150,000|
|£150,000 and above||46% on earnings over £150,000|
Class 2 National Insurance
If you’re self-employed and you make a profit of between £6,515 and £9,568 per year, the National Insurance you have to pay is a fixed weekly amount. For the tax year 2021/22, the amount is £3.05.
If your profit is below £6,515, you don’t have to pay Class 2 National Insurance contributions.
Class 4 National Insurance
If you’re self-employed and you earn profits of £9,568 or more, you’ll have to pay Class 4 National Insurance contributions. You’ll owe nine percent on annual profits between £9,568 and £50,270 and two percent on profits above £50,270.
Value-added tax (VAT)
Because Etsy is a UK VAT-registered business, it must charge VAT to its customers – i.e. its sellers. This means, that as a seller, you have to pay 20 percent VAT on your Etsy fees.
Registering with Her Majesty’s Revenue and Customs (HMRC) to sell on Etsy
As mentioned above, if you’re self-employed and selling on Etsy is your main source of income, you must register with HMRC and file a Self Assessment tax return.
You can submit your return by post, but the quickest and easiest way to do it is online.
What about business expenses?
If you sell on Etsy as a business, you can deduct certain expenses from your tax bill. Some of these include:
- Etsy seller fees
- The cost of the materials you use to make your products
- Advertising and marketing, including photography costs
- Card processing charges
- Postage fees
- Accounting costs
Before submitting your expenses to HMRC, you need to make sure you have evidence of every cost, so it’s a good idea to keep hold of all of your receipts throughout the year.
Why do you need to pay tax if you're selling on Etsy as a hobby?
It’s important to remember that even if you’re only selling on Etsy as a hobby, you may still need to pay tax on the items you sell.
Tax evasion can get you into serious trouble and the possible consequences just aren’t worth the risk.
While HMRC is unlikely to take action against you for making a genuine mistake, there are severe penalties for deliberately misleading the tax office and trying to hide the fraud.
Income Tax evasion and providing false documentation can result in both financial penalties and prison sentences.
However, it’s not all doom and gloom. Provided you understand what tax you owe and you declare it accurately and honestly, selling on Etsy can be a great way to make money on the side and, in time, it could even become your main source of income.