Over the past decade, selling online has become a part of everyday life. Whether through eBay, Depop, Etsy, Facebook Marketplace, or even niche reselling platforms, individuals are tapping into these digital storefronts to turn unwanted items into quick cash. For some, it’s a way to declutter their homes, while others find themselves making consistent sales and turning a hobby into a stream of income.
This shift in online consumer behavior has led many to unknowingly become small-scale business operators without realizing the tax implications. Income generated from these platforms can, in many cases, be subject to taxation. The challenge for many casual sellers is knowing exactly when their online activity transitions from a personal endeavor to a taxable trade.
Selling for profit vs selling personal items
One of the most important distinctions in determining whether online sales are taxable lies in your intention and behavior. There is a clear difference between selling used items you already own and buying or making goods specifically to resell.
If you’re simply clearing out your wardrobe or selling household goods at a lower price than you bought them for, this activity is typically viewed as non-taxable. You’re not making a profit; you’re reclaiming part of what you spent. However, the moment you begin buying items specifically to resell, sourcing products in bulk, or setting prices with the goal of making money, HMRC may consider you to be trading.
It’s not just the items you sell, but how frequently and systematically you sell them. If you’re maintaining stock, using promotional tactics, and reinvesting your earnings into new inventory, these are signs that you may be operating a trading business.
HMRC’s definition of trading
To offer clarity, HMRC uses a range of factors to assess whether an individual is trading. These criteria are not hard rules, but rather guidelines that help paint a full picture of your selling activity. They include:
- Whether you intend to make a profit from the sale
- How frequently you make sales
- Whether you carry out modifications or improvements before selling
- Whether you are buying and reselling with continuity
- Whether your selling activity is organized and structured like a business
This assessment is based on what’s known as the badges of trade. These principles were originally developed through case law and now serve as a framework HMRC uses to judge whether someone’s income is taxable under trading rules.
Understanding the trading allowance
In recognition of the increase in casual sellers and side hustles, HMRC introduced a tax-free trading allowance. This allowance permits individuals to earn up to £1,000 in gross income from trading in a tax year without needing to register or pay tax.
This allowance applies to your total trading income, not your profit. If your total income from selling goods exceeds £1,000 in a single tax year (6th April to 5th April), then you must declare that income, even if your net profit is small.
Those earning less than £1,000 from online sales are not required to report this income, as long as it qualifies as casual trading. However, once your sales exceed the threshold, you must report the full amount—not just the portion over £1,000.
What counts toward the trading allowance
The trading allowance covers all types of casual income from trading goods or services. This includes:
- Reselling clothes, electronics, or collectibles for profit
- Selling homemade crafts or artwork
- Dropshipping or affiliate product sales
- Operating a small online shop via platforms like Etsy
- Market stall sales or car boot resales
If you operate across several platforms, your total income across all of them must be combined when calculating whether you’ve exceeded the allowance. It’s not £1,000 per platform or per product type—it’s £1,000 in total gross trading income.
Registering for Self Assessment
Once your online income exceeds the trading allowance, you’re required to register for Self Assessment. This is the system HMRC uses to calculate and collect Income Tax from people who don’t pay tax through PAYE.
You should register as soon as it becomes clear that your income will go over the limit, even if it’s toward the end of the tax year. You can register online, and once complete, HMRC will issue a Unique Taxpayer Reference (UTR) number. This number is necessary to submit your annual tax return.
Because the UTR can take several days to arrive by post, early registration ensures you have everything in place before the filing deadline.
Key Self Assessment deadlines
There are several important dates to remember when it comes to Self Assessment:
- 5th October: Deadline to register for Self Assessment for the previous tax year
- 31st January: Final deadline to submit your online return and pay any tax owed
- 31st July: Deadline for making a second payment on account if applicable
Failure to meet these deadlines can result in penalties, even if you owe no tax. Submitting late can also increase the chances of an investigation.
Understanding what you are taxed on
When trading online, you are taxed not on your total income but on your profits. This means you subtract your allowable business expenses from your income to arrive at a figure that is subject to tax.
For example, if you earn £3,000 from selling online but spend £1,000 on supplies, packaging, platform fees, and postage, your taxable profit is £2,000. If you have already used your £1,000 trading allowance, only the remaining £1,000 will be subject to Income Tax.
It’s important to differentiate between revenue and profit. Revenue is the total amount of money you receive from sales. Profit is what remains after deducting all costs associated with running your trading activity.
Allowable business expenses
As an online seller, many of the costs involved in running your side hustle may be classified as allowable expenses. These reduce your taxable income and can significantly lower your tax bill.
Examples of allowable expenses include:
- Packaging and shipping supplies
- Postage and courier costs
- Platform selling fees or transaction charges
- Internet and mobile phone use (proportional to business use)
- Stationery, printing, and marketing materials
- Software or apps used for managing inventory or bookkeeping
- Professional fees such as accounting services
You cannot claim personal expenses or costs unrelated to the business activity. If an item or service is used for both personal and business purposes, only the portion used for business can be claimed.
Combining trading income with other income
If you are employed and earning a salary through PAYE, your online income must still be reported if it exceeds the allowance. When you file your Self Assessment return, your employment income and your trading income will be considered together to determine your total tax liability.
For instance, if you earn £28,000 from a part-time job and make an additional £3,000 from online sales, your total income will be £31,000. Your Income Tax will be calculated based on this combined figure. If your total income pushes you into a higher tax band, a portion of your trading profit could be taxed at a higher rate.
National Insurance may also apply depending on how much profit you make and whether HMRC considers your online selling to be self-employment. Class 2 or Class 4 National Insurance contributions may be required if your profits exceed certain thresholds.
Keeping accurate records
Even if you’re earning under the £1,000 threshold, it’s a good practice to keep records of all your sales and expenses. If HMRC raises questions or if your income increases in the future, having clear documentation will protect you.
Good recordkeeping should include:
- Sales invoices and receipts
- Bank statements
- Postage and shipping records
- Supplier invoices
- Notes on which items were sold and at what cost
- Business-related mileage or travel expenses
Records must be kept for at least five years after the 31 January submission deadline of the relevant tax year. This means you need to retain documentation even after you’ve submitted your return.
The risks of failing to report online income
Many casual sellers believe that small-scale trading is unlikely to catch HMRC’s attention. However, tax authorities are increasingly using digital tools to track income from online platforms. Some sites are now required to share data with HMRC, making it easier for them to identify undeclared earnings.
If you are found to be trading without reporting income, HMRC can issue penalties and demand backdated tax payments. The severity of the penalty often depends on whether the mistake was deliberate or accidental. Honest mistakes are generally treated more leniently, especially if you take action as soon as you become aware of the issue.
When to register for Self Assessment
Once your total income from online selling exceeds £1,000 in a single tax year, you are legally required to register for Self Assessment with HMRC. This system is used for calculating and collecting Income Tax from individuals whose earnings aren’t taxed at source through PAYE.
The registration deadline for Self Assessment is 5 October following the end of the tax year in which your income exceeded the trading allowance. For example, if your income surpassed £1,000 between 6 April 2024 and 5 April 2025, you must register no later than 5 October 2025.
Registering early is recommended, especially if you’ve never completed a tax return before. HMRC will send your Unique Taxpayer Reference (UTR) by post, and this can take up to 10 working days to arrive. You need this number to submit your return and make payments.
How to register for Self Assessment
The process to register depends on whether you’ve submitted a tax return before. If you’re new to Self Assessment, follow these steps:
- Visit the HMRC website and create a Government Gateway account if you don’t already have one
- Apply for Self Assessment as a new individual
- Provide your name, address, date of birth, contact information, and National Insurance number
- Indicate that your registration is for self-employment or online trading income
- Submit your application
Once registered, you’ll receive a letter containing your UTR and instructions for activating your account. You’ll also receive a separate activation code by post, which must be used to access the online services portal.
If you’ve previously submitted Self Assessment returns but stopped, you’ll need to reactivate your account by signing back in and updating your information.
Understanding the UTR and its importance
The Unique Taxpayer Reference is a 10-digit number assigned to you by HMRC once you register. It identifies your account and is required for all correspondence and payments. Without it, you won’t be able to file a tax return or access key parts of your Self Assessment profile.
Keep your UTR secure but accessible. You’ll need it when working with an accountant, submitting returns, or paying your tax bill. It also forms part of your login details for most Self Assessment-related activities.
What is a Self Assessment tax return?
A Self Assessment tax return is an annual submission that outlines your income, expenses, and any tax reliefs or allowances you’re claiming. It must be filed online or via paper forms, although online filing is the most common method due to its speed and confirmation tracking.
Online sellers must use the main SA100 tax return form, along with supplementary forms such as SA103S (for simple self-employment income) or SA103F (for more detailed reporting if your turnover exceeds £85,000 or you need to report complex expenses).
The return includes sections for:
- Total income from trading activities
- Allowable business expenses
- Profit after expenses
- Other income (employment, rental, dividends, etc.)
- Tax already paid (e.g., through PAYE)
- Tax reliefs or deductions
You must fill out every relevant section accurately, as mistakes can lead to miscalculations, penalties, or delays in processing.
Combining employment and online income
Many online sellers also have employment income. If you earn a salary and pay tax through PAYE, you must still declare your trading profits on your Self Assessment return. HMRC uses both your PAYE and trading figures to determine your overall tax liability.
Your employer will provide a P60 at the end of the tax year, showing your total income and tax paid. You’ll need this information when completing your return. If you’ve switched jobs mid-year, you may also need a P45 from your previous employer.
Your trading income and expenses are entered separately, and the final tax calculation is based on your total earnings across all sources. Depending on the amount, your additional income might be taxed at a higher rate.
Income tax thresholds and rates
Your total taxable income determines the rate of tax you pay. As of the current tax year, the Income Tax bands in England, Wales, and Northern Ireland are:
- Personal Allowance: Up to £12,570 – 0%
- Basic rate: £12,571 to £50,270 – 20%
- Higher rate: £50,271 to £125,140 – 40%
- Additional rate: Over £125,140 – 45%
Scotland has different bands and rates, so if you live there, be sure to check the applicable thresholds for Scottish Income Tax.
Trading profits are added to your other income to determine which band applies. If your online selling pushes your total income over one of the thresholds, a portion of your income will be taxed at a higher rate.
National Insurance considerations
In addition to Income Tax, you may also need to pay National Insurance Contributions (NICs) if HMRC considers your online selling activity to be self-employment.
There are two main types of NICs for self-employed individuals:
- Class 2 NICs: Payable if your profits are over the Small Profits Threshold (currently £6,725 per year)
- Class 4 NICs: Payable if your profits exceed £12,570 per year
Class 2 contributions are fixed weekly amounts, while Class 4 contributions are based on a percentage of your profits. These contributions are calculated and added automatically when you submit your tax return.
Even if you don’t meet the threshold for NICs, you may choose to pay Class 2 voluntarily to protect your eligibility for certain benefits, such as the State Pension.
Calculating your taxable profit
Your taxable profit is your income from online selling minus your allowable business expenses. The process looks like this:
- Add up all your gross income from sales
- Add up all your qualifying business expenses
- Subtract your expenses from your income to find your profit
- Apply the £1,000 trading allowance if applicable
- Report the resulting profit on your tax return
If your total income is below the £1,000 trading allowance and you choose not to claim any expenses, you don’t need to report anything. But if your income exceeds the allowance or you want to deduct expenses to reduce your profit, you must complete the Self Employment section of your return.
Examples of expense deductions
Online sellers can reduce their taxable profit by claiming a range of legitimate business expenses. These include:
- Marketplace fees charged by platforms
- PayPal or payment processing charges
- Inventory or materials purchased for resale
- Postage and courier services
- Business insurance
- Advertising and promotion costs
- Use of home for business (a portion of your utility bills)
- Internet and mobile phone usage related to the business
It’s important to only claim the portion of an expense that relates to your business. For example, if you use your phone for both personal and business purposes, estimate the business usage percentage and claim accordingly.
Recordkeeping requirements
Accurate recordkeeping is vital when trading online. Even if you only sell part-time or casually, you must be able to prove the figures submitted in your tax return. This includes both your income and expenses.
Essential records include:
- Receipts from customers
- Supplier invoices
- Proof of payment (bank statements, PayPal records)
- Platform sales reports
- Invoices for postage or supplies
- Business mileage logs if travel is involved
You should retain all records for at least five years after the 31 January deadline of the relevant tax year. HMRC can request to see your records at any point during this period as part of a review or investigation.
Dealing with multiple income sources
If you earn income from other sources in addition to online trading and employment—such as rental income, dividends, or interest—you must declare each of them on your tax return.
Each type of income may have different tax treatments and allowances. For example:
- Rental income: Must be reported with allowable deductions for property maintenance
- Dividends: Subject to a separate dividend tax allowance
- Interest on savings: May qualify for the Personal Savings Allowance
When completing your Self Assessment return, use the appropriate supplementary pages or sections to declare each source. This helps HMRC calculate your overall tax liability accurately.
Common errors to avoid when filing
Filing a tax return for the first time can be intimidating. Many online sellers make avoidable mistakes that lead to penalties or incorrect tax bills. Here are a few common errors:
- Failing to register on time
- Forgetting to include income from smaller platforms
- Misclassifying personal expenses as business-related
- Using the wrong tax year for income reporting
- Submitting without checking for omitted figures
- Not keeping proof of expenses
Double-check your figures before submitting and ensure all data matches your records. Using HMRC’s online portal or tax software can help flag inconsistencies before submission.
Making your tax payment
Once you submit your tax return, HMRC will generate a bill based on the information you’ve provided. You can view the total amount due in your online account. Payments must be made by 31 January.
There are several ways to pay:
- Online via debit card or bank transfer
- Through your online banking app
- Setting up a budget payment plan in advance
- Direct Debit for one-off or recurring payments
If your tax bill is more than £1,000 and less than 80% of your total tax has been collected via PAYE, HMRC may ask you to make payments on account. This means paying part of next year’s expected tax in advance.
Payments on account are due in two installments—by 31 January and 31 July—each equal to half of your previous year’s tax bill. You can request a reduction if you expect your income to decrease.
Understanding tax efficiency for online sellers
Once you’re registered for Self Assessment and regularly reporting income from online sales, it’s time to think beyond compliance and focus on tax efficiency. Many individuals who begin selling casually often continue without fully exploring the legitimate ways they can reduce their tax liability.
Being tax efficient means understanding how tax rules work, making informed choices about expenses, and managing your income flow throughout the year. By adopting a more strategic approach, even part-time online sellers can significantly improve their net earnings and prepare for growth if their venture expands into a full-fledged business.
Why proactive tax planning matters
Tax is typically seen as something to address once a year, just before the filing deadline. But if you wait until January to start gathering your records and calculating your tax bill, you may miss out on opportunities to reduce what you owe.
Proactive tax planning allows you to:
- Track expenses in real time
- Plan purchases around the tax year
- Avoid last-minute penalties
- Smooth out cash flow for larger tax bills
- Identify reliefs and deductions early
Keeping tax in mind throughout the year, not just during tax season, gives you the upper hand. It also reduces stress and helps prevent financial surprises.
Claiming allowable business expenses
Allowable expenses are one of the most effective tools for reducing your taxable profit. These are the necessary costs incurred to run your online selling activities. HMRC allows you to deduct them before calculating the final tax amount.
Some common allowable expenses for online sellers include:
- Packaging materials
- Postage and courier services
- Platform subscription fees
- Payment processing fees
- Advertising and sponsored posts
- Product photography tools or services
- Inventory purchases intended for resale
- Office stationery and supplies
- Business-related telephone or internet costs
- Small equipment or tools used exclusively for business
The key is to ensure that the expenses are wholly and exclusively for the purpose of your trading activity. If you use an item for both personal and business purposes, you can only claim the business-related portion.
Simplified expenses vs actual costs
For some expense categories, HMRC offers the option of using simplified expenses. This method allows you to use flat rates rather than tracking and claiming every exact cost. It is especially useful for those who work from home or use a personal vehicle for business.
Simplified expenses can apply to:
- Business mileage
- Use of home for business
- Living on business premises
For example, if you use your home for business activities like storing stock or packing parcels, you can claim a flat rate depending on the number of hours per month you work from home. This is easier than calculating a percentage of every utility bill and internet charge.
However, simplified expenses may not always be the most cost-effective choice. It’s worth comparing flat-rate claims with actual costs to see which results in greater tax relief.
Home office deductions
Many online sellers work primarily from home, using a spare room or even a kitchen table as their base of operations. If this applies to you, there are several ways to claim back the costs of using your home for work purposes.
You can claim a portion of household expenses such as:
- Rent or mortgage interest
- Gas and electricity
- Council tax
- Broadband and phone bills
- Property insurance
The method of claiming can either be based on actual usage (requiring detailed calculations and records) or the simplified method mentioned earlier. If you choose to claim actual costs, you will need to calculate the business-use percentage of your home, based on factors such as the number of rooms and the number of hours worked.
Using accounting software for better tracking
As your trading activities grow, managing income and expenses manually becomes more difficult. Accounting software can simplify the process and help ensure accuracy in your tax return. By syncing your sales platforms and payment processors, software tools can provide real-time reports, organise receipts, and calculate profits.
In addition to reducing human error, using digital tools can help:
- Keep expense categories organised
- Set aside tax payments throughout the year
- Generate profit and loss summaries
- Flag deductible expenses you may have missed
- Estimate your future tax liabilities
Maintaining digital records also prepares you for Making Tax Digital, a government initiative requiring certain self-employed individuals to keep digital financial records and submit updates to HMRC using approved software.
Separating personal and business finances
One of the best practices for online sellers is to separate their business finances from personal accounts. Although not a legal requirement for sole traders, this separation can simplify recordkeeping and make it easier to track income and expenses throughout the year.
Consider opening a dedicated bank account or payment service account solely for online selling. This allows you to:
- Instantly see business-related transactions
- Avoid mixing personal purchases with business costs
- Prepare cleaner documentation for tax submissions
- Identify trends in cash flow and seasonal earnings
Separating your finances becomes even more important as your business grows or if you plan to apply for a business loan or credit in the future.
Setting aside money for tax payments
It’s crucial to remember that no tax is automatically deducted from your online sales income. That means it’s up to you to put aside enough money throughout the year to cover your tax bill.
A good rule of thumb is to save between 20% and 30% of your profits to cover Income Tax and National Insurance. The exact percentage depends on your income level and tax band. It’s better to over-save slightly and end the year with surplus funds than to under-save and scramble to make your payment in January.
Consider setting up a separate savings account for tax purposes. Regular transfers each month based on your trading income can create a tax buffer, ensuring you’re not caught off guard when your bill is due.
Managing payments on account
If your tax bill exceeds £1,000, and less than 80% of your tax is paid through PAYE (if you have other employment), HMRC may require you to make payments on account. These are advance payments toward your next tax bill and are due in two installments:
- 31 January (first payment)
- 31 July (second payment)
Each payment is usually 50% of your previous year’s tax bill. This system ensures that HMRC receives tax payments in advance rather than waiting until the next year.
If your income is expected to decrease, you can request a reduction in payments on account by submitting an estimate through your HMRC account. However, be cautious: underestimating your future tax can result in interest charges on unpaid amounts.
Recordkeeping for tax reliefs and audits
HMRC expects all taxpayers to maintain accurate records to support the income and expenses reported in their tax returns. Good recordkeeping doesn’t just help with compliance; it also supports any claims for reliefs, adjustments, or deductions.
Essential records include:
- Sales invoices and receipts
- Purchase records
- Bank and payment processor statements
- Invoices for supplies and services
- Inventory logs
- Evidence of expense calculations
- Proof of business use for shared expenses
Digital records are acceptable and in many cases preferred, as long as they are complete, accurate, and legible. Store backup copies in secure locations and maintain them for at least five years after the 31 January filing deadline.
Planning for future growth
If your online selling begins to generate substantial income or becomes your main source of earnings, you may need to think beyond tax savings and consider broader financial planning. This includes exploring options like registering as a limited company or hiring an accountant.
Benefits of forming a limited company include:
- Potential for lower tax rates on profits
- Limited liability protection
- Ability to pay yourself through salary and dividends
- Enhanced credibility with suppliers or lenders
However, running a limited company also comes with increased responsibilities, such as corporation tax filings, more detailed recordkeeping, and payroll obligations if you pay yourself a salary.
Deciding when and whether to make this transition depends on your long-term goals, income levels, and willingness to manage the additional administrative requirements.
Exploring other tax reliefs and allowances
In addition to allowable expenses, online sellers may be eligible for other reliefs and allowances that reduce their tax burden. These may include:
- The Personal Allowance, which allows you to earn a portion of income tax-free
- Marriage Allowance, if one partner earns less than the Personal Allowance
- Capital Allowances, for equipment used long-term in your business
- The Rent-a-Room Scheme, if you rent out part of your home
- Trading losses carried forward to offset future profits
It’s important to understand which of these may apply to your situation and how to claim them on your return. Some are applied automatically, while others require specific entries or supporting documentation.
Navigating VAT registration
If your total sales revenue exceeds the VAT registration threshold, currently £90,000 in the UK, you must register for VAT. Even if your profit margin is small, your total turnover (not just profit) determines whether registration is required.
Once registered, you must:
- Charge VAT on your sales
- Submit quarterly VAT returns
- Keep VAT records for all purchases and sales
- Pay collected VAT to HMRC
Registering voluntarily before reaching the threshold is an option for some businesses, particularly if they buy goods from VAT-registered suppliers and want to reclaim VAT on those purchases.
VAT can complicate the administration of your business but may offer advantages in certain situations, especially as your sales volume increases.
Preparing for Making Tax Digital
Making Tax Digital is a UK government initiative aimed at modernising the tax system. It requires self-employed individuals, landlords, and businesses to keep digital records and submit tax data regularly through compatible software.
Although it is currently mandatory only for VAT-registered businesses, future phases will extend to all self-employed individuals with income over a certain threshold. This means that digital bookkeeping will become the standard. Getting ahead of the curve by adopting digital accounting systems now will make future compliance easier and reduce the risk of error as new requirements come into effect.
Conclusion
Selling online has opened the door to new income opportunities, whether through clearing out personal belongings or running a full-time resale venture. But with income comes responsibility and understanding your tax obligations is essential to avoid fines, stay compliant, and make the most of your earnings.
Throughout this series, we’ve explored how HMRC defines online trading, when and how you need to register for Self Assessment, and the importance of tracking income once you surpass the £1,000 trading allowance. We’ve walked through how to report your sales income accurately, the deadlines that matter, and how penalties can arise if you fail to act in time.
We’ve also addressed the practical aspects of online selling like claiming allowable expenses, using simplified methods to reduce tax, and maintaining detailed records. By proactively managing your income, understanding what expenses you can deduct, and using tools or systems that simplify your financial reporting, you can significantly reduce your tax bill and ensure you’re paying only what you owe.
Finally, we looked at strategies for long-term success: separating business and personal finances, preparing for future VAT registration, and digitising your records in anticipation of Making Tax Digital. If your sales continue to grow, adopting business-friendly habits early on will not only keep you compliant but also give you a strong foundation to scale.
Whether you sell casually or as part of a growing venture, your financial responsibilities grow with your profits. Being informed about your tax obligations isn’t just about compliance, it’s about confidence, control, and protecting the future of your online income.
Take what you’ve learned in this guide, stay proactive with your tax planning, and continue building a more sustainable and tax-efficient selling operation online.