Selling online – when do you need to tell hmrc

The rise of online selling in the UK has made it easier than ever to generate income from home. Whether you’re selling handmade goods on Etsy, shifting stock on eBay, or running a full e-commerce store, the income you make is taxable. But here’s the question many online sellers ask: when exactly do you need to tell HMRC? The answer depends on several factors, including how much you’re earning and whether you’re trading as a business or simply having a clear-out.

The £1,000 Trading Allowance

If you’re a sole trader or partnership earning under £1,000 per tax year from self-employment, you might not need to report it to HMRC at all. This is thanks to the Trading Allowance, introduced in April 2017. The allowance essentially gives you tax-free income up to this threshold, provided you’re genuinely trading (rather than making one-off sales of personal possessions).

However, there’s an important caveat: you must still register for self-assessment if your income from other sources takes your total above the self-assessment threshold (£12,570 for the 2024/25 tax year, unless you have untaxed income). If you fall below all thresholds, you don’t need to register or report anything—but it’s often worth doing so anyway to protect your National Insurance record and entitlement to state benefits.

Registering for Self-Assessment

If your online selling income exceeds £1,000 in a tax year, or if you have other reasons to register for self-assessment, you’ll need to tell HMRC. You must register within three months of the end of the tax year in which you started trading (by 5 October for the previous tax year). Failing to register on time can result in penalties, so it’s worth doing it promptly.

Once registered, you’ll file a Self-Assessment tax return each year, declaring your trading income and claiming allowable expenses. The key phrase here is “allowable expenses”—these are costs directly related to your online business. For an e-commerce seller, this might include website hosting fees, packaging materials, payment processing fees, advertising costs, and a proportion of your broadband and electricity. You cannot claim personal expenses, even if you sometimes use them for business purposes.

Declaring Income and Paying Tax

When you file your Self-Assessment return, you’ll report your profit (income minus allowable expenses). If your profit exceeds your Personal Allowance, you’ll owe income tax. For the 2024/25 tax year, the basic rate of income tax is 20% on profits between £12,571 and £50,270.

You’ll also need to consider National Insurance contributions if you’re self-employed. As a self-employed person, you’ll typically pay Class 2 National Insurance (currently £163.80 per year) if your profit is over £6,725, plus Class 4 contributions at 8% on profits between £11,908 and £50,270. These contributions count towards your state pension entitlement, so they’re worth paying.

VAT Registration Thresholds

If your online sales turnover reaches £85,000 in any 12-month period, you must register for VAT. This applies to all businesses, including e-commerce sellers. Once registered, you’ll need to charge VAT on your sales (currently 20% for most goods) and file VAT returns, typically quarterly. The VAT threshold resets annually, so monitor your turnover carefully—crossing it unexpectedly can create complications.

Some online sellers choose to register for VAT voluntarily below the threshold to reclaim VAT on their business expenses, so it’s worth considering whether this would benefit your operation.

Companies House and Limited Companies

If you decide to set up a limited company to run your online business, you’ll need to register with Companies House separately from HMRC. This involves different filing requirements, including annual accounts and confirmation statements. Limited companies have different tax implications (corporation tax, dividend tax, etc.), so it’s a decision worth discussing with an accountant before you proceed.

Conclusion

Selling online doesn’t have to be tax-complicated, but it does require awareness of your obligations. The key is to know your thresholds, keep good records of income and expenses, and register with HMRC when required. Missing these steps can lead to penalties and interest, so it’s better to be proactive than reactive.

For tailored advice on your specific online selling situation—whether you’re just starting out or scaling up—contact Severn Accounting. We’re here to help.

For tailored advice, contact Severn Accounting — we’re here to help.