Business Taxes in the UK: What You Need to Know
Despite the current cost of living crisis many ecommerce businesses are still thriving, mainly due to the continued rise in online shopping. Many entrepreneurs and investors are now jumping on this trend but it’s important to remember that no business is guaranteed success, even in such a booming industry.
Indeed, one potential pitfall for ecommerce startup owners could be a failure to consider legal business requirements and taxes, as these costs can soon add up to a hefty total. In addition, penalties for late tax registration and late tax payments can be devastating for any business, so it’s essential to stay up-to-date with all tax laws and changes.
If you’re planning to start your own ecommerce business in the UK, you’ll need to be aware of the various taxes you’ll have to start paying. Keep reading this helpful guide to discover everything you need to know about ecommerce business taxes in the UK.
If you’re planning to start your own eCommerce business in the UK, you’ll need to be aware of the various taxes you’ll have to start paying.
If you start your business as a sole trader, which is a popular choice for many, you’ll need to start paying income tax on your business’s profits.
As an employee in the UK, your income tax and national insurance contributions will be automatically deducted from your salary through the PAYE system, but all of this changes when you become a self-employed business owner. Instead, you’ll need to manage your own taxes, which means you need to become diligent about maintaining financial records, completing tax returns and adhering to tax deadlines.
In the UK, self-employed people and sole traders pay income tax through HMRC’s Self-Assessment system. As soon as you set up your new ecommerce business as a sole trader, you’ll need to register with HMRC so you can get started on your Self-Assessment tax returns.
The deadline for registering with HMRC is the 5th of October after the end of the tax year in which you became self-employed. If you fail to register by this deadline, or if you ever fail to pay your taxes on time, you’ll face penalties from HMRC.
Throughout each tax year, which always runs from the 6th of April to the 5th of April the following year, you’ll need to maintain financial records of all your business activities so you can keep track of your profits. The current personal allowance for the 2022/2023 tax year is £12,570, which means you don’t pay tax up to this amount. Above this amount, you’ll pay:
- A 20% income tax rate (basic rate) on profits above £12,570 and up to £50,270;
- A 40% tax rate on profits up to £150,000 (higher rate);
- A 45% tax rate on profits over £150,000 (additional rate).
Once you’ve registered with HMRC, they’ll send you your 10-digit Unique Taxpayer Reference (UTR) number and set up your online Self-Assessment account. You can use this account to submit your annual Self-Assessment tax return by the end of January each year, or you can submit a paper return instead by the end of October. Check the Self-Assessment deadlines for the current tax year here.
Sole traders will also have to pay Class 2 and Class 4 National Insurance contributions through their Self-Assessment tax return. For Class 2 contributions, you’ll pay a total of £3.05 a week on profits of more than £6,515. For Class 4 contributions, you’ll pay 9% on profits between £9,569 and £50,270, and you’ll pay 2% on profits over this amount.
Making Tax Digital
The Self-Assessment system will be replaced in the future by the government’s new Making Tax Digital (MTD) scheme. With this initiative, the government is planning to digitalise the tax system to make it easier for individuals and businesses to get their taxes right.
MTD for VAT has already been in place since 2022, which means that VAT-registered businesses currently have to keep digital financial records and use MTD-compatible software to submit VAT returns to HMRC. MTD for Income Tax was meant to be introduced in April 2024, but it has now been pushed back to 2026.
Under the current plans for MTD for Income Tax, self-employed individuals or landlords with a gross income of over £50,000 from these business ventures will have to submit quarterly updates to HMRC about their income and expenses. They will also have to submit an end-of-period statement (EOPS) and final declaration at the end of each tax year. MTD for Income Tax will be extended to those with a gross income above £30,000 in 2027, but further expansions have not been finalised and announced yet.
If you’ve decided to set up a limited company instead of starting your ecommerce business as a sole trader, then you’ll also be liable for corporation tax. You’ll pay corporation tax on your business’s profits after you’ve deducted salaries and business expenses.
When you start your business, you’ll need to register with Companies House. You will also be registered for corporation tax at the same time.
Like with income tax, you’ll need to keep accounting records and submit an annual tax return to HMRC. Your corporation tax return should be filed no later than 12 months after the end of the accounting period it covers. The deadline for paying your corporation tax bill is 9 months and 1 day after the accounting period.
In addition to submitting this tax return to HMRC, you’ll also have to submit your annual company accounts to Companies House, showing how your company has performed over the previous accounting period.
However, unlike income tax, you only pay a flat 19% rate on your profits for corporation tax. There is also no ‘personal allowance’ for corporation tax.
If you become an employer, you’ll need to pay National Insurance contributions on your employees’ income. You’ll pay 13.8% on earnings above £737.01 per month.
You’ll also need to pay Class 1A or Class 1B contributions of 13.8% on employee expenses and benefits. To learn more about National Insurance contributions, read this helpful guide.
Once you start earning more than £85,000 per year, you’ll have to register for VAT. This means you’ll have to charge VAT on the products you sell on your ecommerce website, and you’ll need to submit a VAT return every three months even if you have no VAT to pay or reclaim.
Most products will incur a 20% VAT charge, which must be included in the price and collected from customers at the point of sale. However, certain items will carry a 5% VAT charge and a few are zero-rated. Even zero-rated items must be included in sales records and your VAT return, the latter of which will be submitted to HMRC every three months using MTD-compatible accounting software.
Make sure you indicate your VAT status on your ecommerce website to let customers know if your prices are VAT-inclusive. You should also be aware of VAT rules when buying and selling across different countries, as you must stay on the right side of tax laws and regulations. In addition, customs duty may need to be paid on international shipping, which is particularly relevant for ecommerce businesses following a dropshipping model.
UK Ecommerce Business Taxes: Final Thoughts
Getting your taxes right and paying them on time is essential if you want to run a successful ecommerce business in the UK. Although you may be able to work out payment agreements with HMRC after missing deadlines, the potential penalties could be catastrophic for your fledgling business, so don’t hesitate to ask for advice from your accountant if you’re having issues.