Nowadays, it’s simpler than ever to create your own online shop. You don’t need to be an e-commerce expert or have in-depth technical knowledge – you can turn your business idea into a reality in just a few minutes, using platforms like Shopify, Etsy, and SquareSpace.
But whether it’s just a hobby or your full-time job, it’s important to be aware that there are tax implications to consider when you start selling online. Your extra income needs to be accounted for tax-wise, so it’s highly likely that you’ll need to complete a self-assessment form. Read on to find out more
Remember, your online shop is still a taxable business
Everyone must pay tax on any earnings above the minimum tax-free entitlement. The amount you pay depends on how much you earn. Whether your income comes from a full-time job, renting out a property, or selling through an online shop, it all counts towards this figure – and the total is used to establish how much tax you’re required to pay.
It’s time to register as self employed
You’ll need to make sure you declare your earnings; if you don’t you’re at risk of receiving a fine. This means you need to register yourself as self-employed and complete a self-assessment form every year – even if your online store isn’t your main source of income.
Here’s a brief rundown of the things you need to do to make sure you don’t get caught out by an unexpected bill.
- Register yourself as self-employed by heading to the HMRC website
- Keep a complete list of income and expenses associated with your online shop – and don’t forget to keep your receipts safe, too.
- Complete your annual self-assessment before 31 January, summarising all your business income and expenses. An accountant can help with this if you’re having trouble.
- Pay your tax and National Insurance by 31 January every year. Your payments on account are due by 31 July each year – this is usually 50% of your previous year’s tax bill.
When it comes to registering as self-employed, it only takes a few minutes to apply. But the whole process can take around ten days to complete, so the earlier you get it done the better. When it’s complete, HMRC will send you a UTR number (Unique Tax Payer’s Reference) in the post. You’ll need to keep this in a safe place, because you’ll need to include it in your self-assessment tax return.
How much tax do I need to pay?
The amount you owe will be based on the income from your online shop – as well as any other income you have. Basically, if you have a job that pays you £25,000 and you make an extra £5,000 from your store, then your taxable earnings will come to a grand total of £30,000. You’ll pay tax on this figure.
Bear in mind that if you pay tax through the payroll system for your job, this can be deducted from the payable amount. It’s worth having a look at your payslips or your P60 to see how much tax you pay.
What are allowable expenses?
Any business expenses associated with your online shop will allow you to reduce your tax bill. Usually, your business expenses must be ‘wholly, necessarily and exclusively’ incurred in the performance of your business. If you make any incorrect claims, you could have to pay a penalty – so be careful. You also need to keep your receipts (both paper and email) as evidence.
A few typical tax allowable expenses for online stores include the following:
- Computer and printer – if you buy a computer and printer to run your online business
- Website costs – like a website template for your online shop and your domain name
- Your stock – and anything you buy in order to produce the stock you sell online.
- Insurance – like liability insurance
- Use of home – a portion of your household bills, like water, gas and electricity
- Marketing/SEO/PPC – online and offline marketing, paid adverts or a marketing assistant
- Accounting and bookkeeping – including accountant fees and any accounting software
- Bank charges – paid on your business bank account.
Need a hand with anything?
If you’re still unsure about anything, it’s worth giving HMRC a call. They’ll be able to answer your questions and take you through the next steps.