Online Sales Tax - All You Need To Know
Earning extra income through online platforms has become increasingly popular, and it's essential to understand the tax rules to ensure compliance with HM Revenue and Customs (HMRC) regulations (and avoid any nasty fines).
Here's a guide to help you navigate the tax responsibilities associated with your side hustle.
What is the Online Sales Tax?
Firstly - you won’t find anything specifically called an ‘Online Sales Tax’.
The way you’re taxed when you make a profit (online or otherwise) hasn’t changed.
What has changed is now platforms such as eBay, Etsy & Airbnb now report your eanings on their platforms to HMRC.
It’s important to remember here the difference between earnings and profit.
You may have earnings (aka income / sales / turnover) of £100k (nice!) but you may also have expenses of £100k - therefore your profit is zero / zilch / nowt!
In this case, there would be no tax to pay.
Understanding the Trading Allowance
In the UK, individuals can earn up to £1,000 per tax year from self-employment without needing to inform HMRC or pay tax, thanks to the trading allowance.
This means that if your total income from online activities - such as selling goods, offering services, or completing online surveys—does not exceed £1,000, you typically don't need to declare it. However, if your income surpasses this threshold, it's crucial to take the following steps:
Register for Self-Assessment: You must register as self-employed with HMRC by 5 October following the end of the tax year in which you earned the income.
This process will enable you to complete a Self-Assessment tax return (lucky you!).
Complete a Tax Return: Declare your total income and allowable expenses on the Self-Assessment tax return.
You can choose to deduct the £1,000 trading allowance from your total income instead of claiming actual expenses, if this is more beneficial.
Clearly - if your expenses are less than £1,000 - it’s a no-brainer to claim the full £1k.
Pay Income Tax and National Insurance: After submitting your tax return, HMRC will calculate any income tax and National Insurance contributions due based on your taxable profit.
The filing deadline and payment for any taxes is 31 January following the end of the Tax Year (being 5th April)
This gives you almost 9 months to get filing and saving for any tax you have to pay.
Income from Online Surveys and Non-Cash Rewards
Earnings from online surveys, even if paid in vouchers or other non-cash forms, are generally considered taxable income.
It's important to keep detailed records of these earnings, including the value of any vouchers received.
If your total income from such activities exceeds the £1,000 trading allowance, you are required to declare it to HMRC.
Keeping good Records
Maintaining accurate records is vital for all self-employment income. Ensure you:
Track All Income: Keep a log of all earnings, including dates, amounts, and sources (see my downloadable tracker).
Track All Expenses: Retain receipts and records of any expenses related to your side hustle, as these may be deductible.
If you don’t claim an allowable expense it means you’re overpaying tax - yikes!
Keep All Correspondence: Save any communications related to your online activities, such as emails confirming sales or survey completions.
My advice is to set up a free Gmail account and email yourself everything related to your Side Hustle.
Conclusion
While earning extra income online is a great way to boost your finances, it's essential to understand and fulfill your tax obligations.
By keeping thorough records, staying informed about tax regulations, and accurately reporting your income, you can enjoy the benefits of your side hustle without any legal complications.
For more detailed information, refer to HMRC's guidelines on self-employment and the trading allowance.
