A Guide to Tax on Online Income
7th May, 2025
Selling online opens up huge opportunities, whether you’re running a Shopify store, offering digital downloads, or managing an international subscription platform.
But with those rewards come responsibilities, especially when it comes to taxes on online income.
The rules around online sales and paying taxes can be confusing, especially when you’re dealing with VAT, cross-border sales, and different thresholds.
If you’re not careful, a tax oversight could impact your bottom line hard. But don’t worry, we’ll break it down for you…
What Counts as Trading When Earning Online?
If you’re earning money through online platforms, either selling products online, offering digital services, or monetising content, you’re likely to be subject to UK tax laws.
The HM Revenue & Customs (HMRC) mandates that people and businesses earning over £1,000 annually from these activities must declare this income.
From January 2025, online platforms will begin sharing data with HMRC to ensure tax compliance. This move highlights how important it is for online sellers to keep good records and file their taxes on time.
Essential Tax Factors for E-commerce and Digital Businesses
Here are the key tax areas every online business needs to stay on top of:
1. Value Added Tax (VAT) Obligations
VAT is an important consideration for online businesses. If your taxable turnover exceeds £85,000, VAT registration is mandatory. This applies to both domestic and international sellers operating in the UK.
Digital services (like streaming, software downloads, and online subscriptions) are subject to VAT at the standard rate of 20% when supplied to UK consumers.
For a more in-depth understanding of VAT registration and filing, check out our VAT Guide.
2. Digital Services Tax (DST)
The UK imposes a 2% Digital Services Tax on revenues generated from specific digital activities, including social media services, search engines, and online marketplaces.
This tax primarily affects large multinational enterprises with substantial UK revenues, typically those generating more than £500 million globally, with at least £25 million attributable to UK users.
Although small businesses are currently exempt, the DST reflects a growing global trend toward taxing digital activity at the point of user interaction.
3. International Tax Compliance
For e-commerce and digital businesses operating across borders, international tax obligations are essential for compliance and business growth.
Many countries have introduced digital sales taxes or specific VAT/GST rules that apply to non-resident sellers, particularly B2C digital services like software, streaming, and online subscriptions.
Failing to comply with local tax rules in these countries can result in fines, backdated tax bills, and reputational damage. For example, the EU’s VAT One-Stop Shop (OSS) scheme simplifies cross-border compliance but requires precise registration and reporting.
Other jurisdictions, including Australia, Canada, and the US, each have their own thresholds and digital tax regimes.
How Haggards Crowther Can Help
The complicated climate of online income taxation requires specific expertise and knowledge. At Haggards Crowther, we offer specialist tax support, including:
- VAT Registration & Compliance: Ensuring your business meets all VAT obligations efficiently.
- Digital Services Tax Guidance: Helping you understand and comply with DST requirements.
- International Tax Planning: Providing strategies for global tax compliance and optimisation.
Ready to Take the Stress Out of Online Tax Compliance?
Proactive tax planning is essential for sustainable growth in the digital marketplace. Don’t let tax confusion hinder your business potential.
Contact us today to schedule a consultation regarding VAT Registration, Digital Services Tax, and International Tax Compliance. Simply give us a call on 020 7384 0920, send an email to enquiries@haggards.co.uk, or fill in our online contact form here.
Stay informed and ahead of tax obligations with our expert guidance at Haggards Crowther.
FAQs
Do I need to pay tax on online income in the UK?
Yes. If you earn more than £1,000 annually from online sources such as selling products, offering digital services, or monetising content, you’re required to report this income to HMRC. This includes income from platforms like Etsy, eBay, Amazon, Shopify, YouTube, and other digital marketplaces.
How do I report tax from selling online in the UK?
If your earnings exceed the £1,000 trading allowance, you’ll need to register for Self Assessment and submit a tax return. You must keep accurate records of your sales, expenses, and profit to calculate your taxable income.
Our team at Haggards Crowther can assist with tax returns, record-keeping, and ongoing support for digital businesses.
Do I need to register for VAT when selling online?
Yes, if your taxable turnover exceeds £85,000 within a 12-month period, you’re legally required to register for VAT. This applies whether you’re selling physical goods or providing digital services.
What taxes apply to digital products and services in the UK?
Digital products and services (software, e-books, and online subscriptions) are subject to UK VAT if sold to consumers.
Large platforms offering digital services may be subject to the 2% Digital Services Tax (DST). If you’re unsure how this applies to your business, we offer expert guidance on DST and international digital tax compliance.
How can I reduce my tax liability as an online seller or digital entrepreneur?
There are several legal strategies to reduce your tax bill, including claiming allowable business expenses, using the trading allowance, registering for VAT efficiently, and planning for international compliance. Haggards Crowther specialises in working with e-commerce and digital businesses to ensure you’re not paying more tax than necessary.
Terry started life at HM Revenue and Customs before moving to Ashdens and then on to BDO and Chantrey Vellacott, the combination of which has provided Terry with a wide breadth of experience which has proved invaluable when helping a broad range of clients with their tax affairs.
Whether it involves meticulously organising a client’s tax affairs or leveraging his expertise to mitigate their tax exposure, Terry has a passion for delivering tangible results.
