Selling Online in the UK: What to Do If HMRC Contacts You About Your Income

Selling through platforms like eBay, Facebook Marketplace, Amazon, Etsy and Vinted has become an increasingly common way for people across the UK to earn additional income. Whether you’re selling handcrafted products, vintage finds or second-hand clothes from your wardrobe, what begins as a hobby or way to declutter often becomes a regular side hustle. Some even build these ventures into thriving full-time businesses.

But as more people earn money online, HMRC has taken steps to ensure that taxable income doesn’t go undeclared. For many casual sellers, being contacted by HMRC can come as a surprise. They often believe what they’re doing is too small to matter, especially when they’re just earning a few hundred pounds here and there. However, there are clear rules around when income from online selling becomes taxable, and misunderstanding these rules can lead to issues.

When HMRC Gets Involved

As of January 2024, HMRC has rolled out new reporting requirements for digital platforms. These platforms are now obliged to collect and submit seller data to HMRC by January 2025. The goal is to track undeclared income more efficiently and close the tax gap caused by non-compliance.

While this might sound intimidating, not everyone selling online will be affected. Those who sell fewer than 30 items annually and make less than €2,000 (approximately £1,720) won’t have their details automatically reported by the platforms. However, this doesn’t mean you’re entirely off the hook. If you earn over £1,000 in gross income through online selling, you may still need to report it to HMRC.

The distinction between personal and trading activity is important. Selling off old electronics or clothes you no longer need, without intending to make a profit, typically isn’t taxable. But when you make goods specifically to sell, or buy items to resell, that’s considered trading. The intention behind your sales and the frequency of transactions are key factors HMRC considers when determining tax liability.

The £1,000 Trading Allowance Explained

In the UK, the first £1,000 of gross trading income is covered by a trading allowance. This means if your earnings from online sales don’t exceed this amount in a tax year, you don’t have to declare it to HMRC or pay any tax. This allowance is designed to cover occasional or minor trading activities.

Once your online sales exceed the £1,000 threshold, you must consider whether your activity qualifies as a business. If so, you need to register with HMRC and report your income through the Self Assessment system. Whether or not tax is payable depends on your overall income and whether it exceeds the personal allowance threshold, which for the 2024/25 tax year is £12,570.

It’s important to remember that the £1,000 allowance applies to all trading income combined. So if you sell across multiple platforms, you must aggregate those earnings when determining whether you exceed the threshold.

Receiving a Letter from HMRC

If HMRC suspects you’ve earned taxable income from online sales and haven’t declared it, you may receive a letter encouraging you to review your earnings and take action. These “nudge letters” are becoming increasingly common. They typically ask recipients to confirm whether additional income has been correctly reported.

If you receive such a letter, don’t ignore it. Even if you believe it’s been sent in error or that no tax is due, it’s vital to respond within the timeframe stated, which is usually 30 days. Ignoring correspondence from HMRC can result in enforcement action and penalties.

It may also be necessary to register for Self Assessment and file a tax return. If you’re uncertain about how to proceed, getting advice from a tax professional can help. They can assess your situation and communicate with HMRC on your behalf, ensuring the issue is dealt with correctly.

Selling Online While Employed Full-Time

Many people who sell online also have full-time jobs. They assume that because their main source of income is taxed through PAYE, they don’t need to worry about tax on side income. This is a common misconception.

The key point is that tax obligations apply to all taxable income. So, if you sell online and make over £1,000 in gross income in a single tax year, you must report it, regardless of your employment status. You only start paying tax on that income if your total taxable earnings exceed the personal allowance threshold.

This additional income must be declared through a Self Assessment tax return. If you haven’t already registered for Self Assessment, you must do so by 5 October following the end of the tax year in which you earned the income. Late registration may lead to fines.

Understanding Your Responsibilities

It’s the individual’s responsibility to determine whether they need to pay tax on their online income. Ignorance is not an acceptable excuse. HMRC expects you to assess your own situation, report any taxable earnings, and pay what you owe. The online tool provided on the government website can help you check whether you need to report additional income.

If you’ve started selling online regularly, it’s a good idea to get familiar with what counts as trading and what doesn’t. Not everyone who sells items online is classed as a trader, but once your intention becomes profit-driven or your activity becomes frequent, the tax rules change.

Getting Started with Self Assessment

Once you realise that your online sales have exceeded the £1,000 trading allowance or that your selling activities qualify as a business, it’s time to get set up with HMRC. The most common route for individuals in this position is registering as a sole trader. This is straightforward and can be done through the government’s official website.

Registration must be completed by 5 October following the end of the tax year in which the income was earned. For example, if you earned taxable income during the 2024/25 tax year (which ends on 5 April 2025), you must register by 5 October 2025. Failing to meet this deadline can lead to fines and penalties.

Registering for Self Assessment means you’ll be responsible for submitting an annual tax return that includes details of your income and expenses. You’ll also need to pay any Income Tax and National Insurance contributions due.

The Tax Return Process

Once registered, you’ll need to complete a Self Assessment tax return each year. This includes a main form (SA100) and a supplementary page (SA103) to report your self-employment or trading income. You’ll declare your total income from online sales, deduct any allowable expenses, and calculate your profit.

If you’re new to the process, it’s important to gather all the necessary information well in advance. This includes records of all sales, any costs incurred, and receipts for any purchases related to your online activity. The deadline for submitting an online Self Assessment tax return is midnight on 31 January following the end of the tax year. Missing this deadline results in an automatic £100 penalty, even if you owe no tax.

Choosing Between the Trading Allowance and Actual Expenses

You can choose to take the £1,000 trading allowance instead of claiming actual expenses, but not both. If your expenses are greater than £1,000, you may benefit more by deducting your real costs from your income. This allows you to reduce your taxable profit and, potentially, your overall tax liability.

Common allowable expenses include costs for packaging, postage, platform fees, advertising, materials, and other business-related costs. If you work from home, you may also be able to claim a proportion of your household expenses, such as heating and internet.

Deciding between the trading allowance and actual expenses should be based on which gives you the greatest tax advantage. If your expenses are minimal, the allowance might be easier. But if you spend significantly on your business activities, recording and claiming real costs will likely save you more.

Estimating How Much Tax You’ll Pay

Your tax bill depends on your total taxable income, which includes all sources of income, not just your online sales. For the 2024/25 tax year, the personal allowance is £12,570. This is the amount you can earn before paying any Income Tax.

Income above that threshold is taxed at the following rates:

  • Basic rate: 20% on income between £12,571 and £50,270
  • Higher rate: 40% on income between £50,271 and £125,140
  • Additional rate: 45% on income over £125,140

If your online sales are your only source of income and they remain below the personal allowance, you won’t owe any Income Tax. However, if your total income from employment and online sales exceeds the allowance, you will pay tax on the portion above it.

In addition to Income Tax, if your trading profit is more than £1,000, you’ll also need to pay Class 2 and Class 4 National Insurance contributions. Class 2 is due if your profits are £6,725 or more. Class 4 is due on profits above £12,570.

Keeping the Right Records

HMRC expects individuals who are self-employed or trading to maintain accurate records. These records help ensure that your tax return is complete and correct. They also serve as proof in case HMRC requests evidence of your reported income or expenses.

Records you should keep include:

  • Invoices or receipts for all sales
  • Copies of sales transactions from platforms like eBay, Amazon, or Etsy
  • Records of any fees charged by those platforms
  • Receipts for purchases of goods or materials
  • Utility bills and other expenses if you work from home

Keeping digital copies of receipts and maintaining a spreadsheet or using accounting software can simplify this process and reduce the risk of errors.

HMRC recommends keeping these records for at least five years after the 31 January deadline for the relevant tax year. For example, if you file your 2024/25 tax return by 31 January 2026, you should keep your records until at least 31 January 2031.

What Happens If You Don’t Report Your Online Income

If you fail to report income from online selling and HMRC later finds out, the consequences can be significant. Not only will you be required to pay any tax due, but you’ll also face penalties and interest on the outstanding amount.

The size of the penalty depends on several factors, including whether HMRC considers the failure to be deliberate or careless. Coming forward voluntarily before HMRC contacts you can significantly reduce the penalty, and in some cases, eliminate it entirely.

Even if you’ve underpaid due to an innocent mistake, HMRC still expects the tax to be paid. Interest is charged from the date the tax was due. If HMRC deems the non-disclosure to be deliberate, penalties can be severe.

Reporting Past Income from Previous Years

If you realise that you should have reported income from online selling in previous years, it’s often best to come forward voluntarily. HMRC has procedures in place to allow people to correct past mistakes. Depending on the circumstances, this may involve filing returns for previous years or submitting a disclosure using the Digital Disclosure Service.

Voluntary disclosure is generally viewed more favourably by HMRC and can reduce the penalties you’re charged. However, if HMRC has already started an investigation and you failed to report the income, penalties are likely to be higher.

You may also need to explain how the income arose, why it wasn’t previously reported, and provide supporting documents. Being transparent and cooperative throughout the process can help you achieve a more favourable outcome.

Getting Professional Help

While it’s entirely possible to manage your own tax affairs, seeking advice from a tax professional can be worthwhile, particularly if your situation is complicated or if you’ve received a letter from HMRC. A qualified adviser can help you understand your obligations, check your records, and calculate how much tax is due.

Professional assistance is especially valuable if you:

  • Have mixed income from employment and self-employment
  • Are unsure whether your sales qualify as a business
  • Have received a nudge letter from HMRC
  • Need to make a disclosure for previous years
  • Are planning to grow your online selling into a full business

Tax advisers can also help you make the most of legitimate allowances and deductions, potentially saving you money while ensuring compliance.

Preparing for the Next Tax Year

Once you’ve registered and filed your return for the first time, it’s important to stay on top of your responsibilities going forward. That means:

  • Keeping regular and up-to-date records
  • Setting aside money to cover your future tax bill
  • Staying aware of key deadlines for registration and filing

You may also wish to consider setting up a separate bank account for your online sales. This makes it easier to track income and expenses, and can simplify the process of preparing your tax return.

You can also make payments on account toward your future tax bill if your last tax bill was over £1,000. These advance payments are due on 31 January and 31 July each year. While not everyone is required to make these payments, it’s important to understand whether they apply to your situation. By staying organised and informed, you’ll reduce the stress associated with tax season and avoid any unpleasant surprises from HMRC.

Building Good Habits for the Long Term

Once you’ve understood your responsibilities and have taken the initial steps to register with HMRC and report your online income, it’s crucial to develop habits that support long-term compliance and make the process easier year after year. This includes keeping up with deadlines, maintaining proper records, and setting aside money to cover your tax liabilities.

Getting into the routine of updating your records regularly helps prevent a stressful scramble at the end of the tax year. This is especially important if your online selling starts to grow, turning from a side hustle into a significant source of income.

Staying Organised Throughout the Year

Good organisation is essential for self-employed individuals, including those earning income from online sales. Creating a system that works for you can make record-keeping more manageable. This might involve keeping a spreadsheet or using digital tools to log sales and expenses.

Make it a habit to record transactions as they happen. This means noting each sale, the amount received, the date, and the method of sale. Keep all receipts and invoices related to costs incurred in connection with your sales. These could include packaging materials, postage, listing fees, or purchases of stock.

You should also set calendar reminders for important dates such as the 31 January tax filing deadline or 31 July if you need to make a payment on account. Missing these deadlines can result in penalties and added stress.

Budgeting for Your Tax Bill

Many first-time sellers fail to realise that not all the money they receive from sales is theirs to keep. If your online income is taxable, part of it needs to be set aside for future tax payments. One effective strategy is to regularly set aside a percentage of your profits. A good rule of thumb is to save around 20% to 30% of your profits to cover tax and National Insurance.

If your income varies throughout the year, consider saving more during busier months. Keeping this money in a separate savings account can ensure that you’re not caught short when your tax bill is due.

You might also be required to make advance payments toward your next tax bill, known as payments on account. These are due in two installments, on 31 January and 31 July, and are based on your previous year’s tax bill. If your earnings increase, you may owe a balancing payment the following January.

Understanding Allowable Expenses in Detail

Claiming business expenses can significantly reduce the amount of tax you pay on your profits. Common allowable expenses for online sellers include:

  • Postage and delivery costs
  • Packaging supplies
  • Platform or listing fees
  • Internet costs (a reasonable portion if used for business)
  • Materials or stock purchased for resale
  • Advertising and marketing costs

If you work from home, you may also be able to claim a proportion of household expenses. This could include part of your rent or mortgage interest, utility bills, and internet costs. HMRC provides simplified methods for calculating these claims, which can save time and ensure accuracy.

It’s important to only claim the portion of expenses that relate to your business activity. Personal expenses or dual-purpose costs that aren’t clearly connected to your online selling should not be included.

Digital Tools for Tracking Sales and Expenses

Using accounting software or spreadsheet templates can simplify tracking your income and expenses. Many platforms that host online sellers offer downloadable reports showing your sales, fees, and other key data. Regularly downloading and reviewing this information can keep you in control of your business finances.

Storing receipts and invoices digitally—whether by scanning or photographing paper copies—can also reduce paperwork and help you stay organised. Digital records are accepted by HMRC and are easier to manage in the long run.

Navigating Platform-Specific Tax Considerations

Each online marketplace has its own policies and fee structures. These can affect your record-keeping and how you report your income.

For example, some platforms deduct fees at the point of sale, while others bill you separately. Be sure to understand how each platform handles payments and fees, so you can accurately report your gross income and expenses.

You should also pay attention to international sales if you’re selling outside the UK. Selling to overseas buyers can involve additional tax rules or reporting requirements. Understanding VAT thresholds and cross-border regulations can help avoid unintended non-compliance.

Handling HMRC Inquiries and Audits

If HMRC contacts you for more information about your online income, respond promptly and professionally. An inquiry does not necessarily mean you’re in trouble—it could be a routine check.

Having well-organised and accurate records makes it easier to satisfy HMRC’s questions. If you’re unsure how to respond or if the situation is more complex, you can seek advice from a qualified tax adviser.

Being honest and cooperative throughout the process typically results in a smoother resolution. If you’ve made a genuine mistake, HMRC may be more lenient than if they believe you have deliberately tried to hide income.

Expanding from Side Hustle to Business

If your online sales continue to grow, you may find yourself transitioning from casual seller to full-time business owner. As your income increases, additional responsibilities and opportunities arise.

You might need to consider registering for VAT if your turnover exceeds the VAT registration threshold. You may also explore forming a limited company if this becomes more tax-efficient than operating as a sole trader.

At this stage, business planning becomes increasingly important. You’ll want to consider factors like pricing strategies, supply chain management, and scaling your operations. This level of activity often warrants hiring professional support such as an accountant or business adviser.

Avoiding Common Mistakes

Many online sellers make errors that can lead to tax trouble. Common pitfalls include:

  • Assuming small amounts of income don’t need to be declared
  • Forgetting to report income across multiple platforms
  • Failing to keep adequate records of sales and expenses
  • Missing important deadlines for registration or filing
  • Not budgeting for tax payments

Being aware of these risks can help you avoid penalties and unnecessary stress. The earlier you get into good habits, the easier it is to stay compliant.

Planning for the Future

Even if online selling is just a side hustle, taking it seriously from a tax perspective helps protect you from future problems. Regularly reviewing your income, keeping records up to date, and staying informed about changes in tax rules puts you in a better position to manage your responsibilities.

If you plan to grow your online business, understanding your tax obligations is essential. It can also help you make smarter decisions about pricing, investment, and expansion.

Building a sustainable business starts with a solid understanding of your financial and tax responsibilities. By following best practices now, you lay the foundation for success, whether your online selling remains a part-time activity or becomes your main source of income.

Conclusion

The rise of online marketplaces has opened up countless opportunities for individuals to earn money by selling goods from second-hand items to handcrafted products. While the convenience and potential income are appealing, it’s essential to recognise that HMRC closely monitors online activity, and failing to meet your tax obligations can lead to serious consequences.

Whether you’re casually selling items on the side or building a business through platforms like eBay, Etsy, Amazon, or Vinted, knowing where you stand in the eyes of HMRC is crucial. If your total sales across all platforms remain under the £1,000 trading allowance, you likely won’t need to report them. But the moment your income exceeds that threshold, you step into a new category with responsibilities that include registration, accurate record-keeping, and timely tax reporting.

Responding promptly to HMRC’s communications, understanding when and how to register for Self Assessment, and maintaining detailed records will not only help you stay compliant but also make managing your side hustle more straightforward. Choosing between the trading allowance and actual expenses, budgeting for your tax bill, and using tools to keep organised can significantly reduce your tax liability and ensure peace of mind.

Above all, honesty and consistency are your best tools. If you’ve made mistakes in the past or didn’t realise you were liable for tax, coming forward voluntarily can minimise penalties and demonstrate your willingness to comply with tax regulations.

By applying the guidance covered in this series, understanding your obligations, acting early, and staying organised, you can continue selling online confidently, whether as a part-time source of income or a stepping stone to a thriving business. HMRC’s increasing focus on online sales shouldn’t be seen as a threat but as a prompt to treat your income seriously and responsibly. When you approach it that way, you’ll be well-positioned to grow your venture with confidence.