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Amazon Sellers Guide to UK Tax & Registration

April 2, 2021 by Andrew Minalto - 0 Comments
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Sole Trader vs Limited Company for New Amazon Sellers in 2021

I often get asked what’s the main thing that holds people back from starting a successful business and for me the answer is very easy – fear of failure and information paralysis. 

What’s information paralysis? Well put simply it’s when you’re stuck in a never ending cycle of research! 

Of course you can’t just go diving in head first with no clue what you’re doing – that’s a sure fire way to guarantee things go wrong. But at the same time you don’t need to know absolutely everything – a lot of stuff you’ll learn and pick up as you go

And that’s exactly what I try to teach on this blog. I want you to have all the integral knowledge so that you’re able to start and grown your own Amazon FBA business. 

So in today’s post let’s go over what’s probably the most common first question I get from people looking to start their own online business. 

And unlike some other stuff that you can figure out as you go, this is one point that you need to think about properly as it will have a drastic effect on how much tax you pay! What am I talking about? The age-old question of should I register as a limited company or sell as a sole trader?  

Let’s get to it! 

When Amazon Sellers should register in the UK? 

It used to be that you had a 3 month grace period of being a sole trader before you had to register with HMRC as self employed, regardless of how much you were making, but the rules changed in April 2017 and you now only need to let them know if you earn more than £1,000 a year from your self employment. 

Of course, the plan is to be making many times that so once you’ve passed the £1000 trading allowance threshold, you have the choice of being a sole trader and registering for self-assessment or registering your business as an Ltd company. 

BUT for Amazon sellers you have to make this choice straight away anyway as it’s part of the registration process. 

You’ll either have to provide Amazon with your Unique Tax Reference (UTR) which is given to you by HMRC when you register as a sole trader, or you’ll need to provide Amazon with your company registration number if you’re a Ltd company. 

Now there are a number of pros and cons to having a limited company vs selling as a sole trader, which we’ll cover a bit later, but by far the most important thing to consider is TAX, and there can be a huge difference here depending on which you go with and your own personal circumstances. 

If you have a Limited company then you’ll pay a set tax on any profits known as the Corporation Tax and this is 19% in the UK. 

If on the other hand you’re a sole trader, all profit you make from your business is counted as income and taxed alongside all other earnings. 

This means that for HMRC it doesn’t matter if you made £20,000 from your Amazon business, £30,000 from your job and £2,000 from eBay – it all counts as one income. 

And the tax rate you pay depends on the total amount you earn. For the tax year 2021-2022 there are 3 income bands as follows: 

Tax BandTaxable IncomeTax Rate 
Basic Rate£1 to £37,70020%
Higher Rate£37,701 to £150,00040%
Additional RateOver £150,00045%
UK Tax Rates by Taxable Income

But there are two important points that you have to understand. 

  1. You get a set amount of income each year that’s not taxed. This is known as your Personal Allowance and for 2021-2022 it’s £12,570. The taxable income above is for income earned after this personal allowance. 
  1. The tax rate only applies to amounts earned in that tax band.  

I’m really shocked by the amount of people who get this wrong! It’s something you hear so often – “if I earn £60,000 then I’ll actually take home less money because of the higher tax…”

No! That’s not how it works at all! 

Sample Tax Calculation for UK Amazon Seller

If you make £60,000 in a year, the tax you pay will be calculated like this: 

  • The first £12,570 – 0% tax = £0 tax
  • The next £37,700 – 20% tax = £7,540 tax
  • The final £9,730 – 40% tax = £3,892 tax

So from a total income of £60,000 (£12,570 + £37,700 + £9,730) you pay £11,432 (£7,540 + £3,892) in tax which gives you an overall tax rate of 19%. 

In this case it’s exactly the same as the corporation tax rate for Ltd businesses and really that’s a good guide point. If your total income is above £60,000 then you’ll pay less corporation tax than income tax. And vice versa – if your income is below £60,000 then you’ll likely pay less income tax than corporation tax. 

This is of course a very simple conclusion as tax rates can change based on your marital status and some other specific details, and it also doesn’t take into account national insurance. 

That’s why your personal circumstances are so important to consider when it comes to the sole trader vs Ltd company debate.

But before you get the calculator out and start making a decision based purely on your income and business goals, there are some other factors to consider as well. 

PROs of a Ltd Company for Amazon Sellers

Legally Separate Entity 

With a Ltd company your personal assets are protected and legally separate from your business, unlike when you’re operating as a sole trader where you’re personally liable. This is why I always suggest getting full liability insurance if you’re a sole trader, to protect yourself and your assets. 

Separate Banking and Credit and Access to Business Lending 

While you can open a business account as a sole trader, it’s much easier to do as a Ltd company and you can also build up your business credit rating separate from your own. This is important when it comes to business loans and financing and again, you won’t have to use your own personal assets as collateral. 

Higher Credibility 

Generally Chinese manufacturers are completely happy to sell to sole traders, it doesn’t make any difference to them at all. But there are times when having a Ltd company gives you a more professional and credible look, especially if you’re dealing with other companies in the UK or Europe. 

More Flexible Tax-Efficient Payment Options

With an Ltd company, there are a number of different ways to pay yourself – director’s salary, dividends, spouse dividends, etc. With a good accountant who knows what they’re doing, you can really maximize your take-home pay using some clever tricks. 100% legal of course and I’ve got some future in-depth guides planned on this! 

PROs of being a Sole Trader for Amazon Sellers

No Cost to Get Started 

When operating as a sole trader there’s no need to register with Companies House and no incorporation fee to be paid. You simply inform HMRC, they send you your UTR and you’re good to go! 

Full Control of Profits 

As a sole trader your business money and your money are basically one and the same. You can transfer to and from your personal account and in fact you don’t even have to use a separate account for your business. As long as you complete your self assessment accurately and pay the correct tax, you can pretty much do what you want with the money. 

With a Ltd company it’s not quite as simple. You can’t transfer money around like that – this is the other side to having a legally separate entity as the company’s assets and profits legally belong to the company, not you as the owner. 

There are basically 3 ways to legally pay yourself from a Ltd company and they are 1) salary, 2) dividends and 3) director’s loans and it must always be properly recorded and accounted for. 

Which brings us perfectly to the next pro of being a sole trader vs running a Ltd company:

Simplified and Cheaper Accounting and Paperwork 

As a sole trader your accounting requirements are incredibly simple – you keep your own records and complete a yearly self assessment and that’s pretty much it! It’s something you can easily do yourself or with the help of very basic software. 

With a Ltd company on the other hand it’s much more complex. There are specific requirements in place on how you store your accounts and the records you have to keep to complete your annual Confirmation Statement and Company Tax Return. 

While it’s technically not legally required, you’ll have to hire an accountant to handle this all for you. The cost can vary hugely but realistically you’re looking at £100 a month to get this taken care of by a professional. It’s far from a huge expense but at the same time it’s still a lot more than the £0 a year it costs to do your self-assessment and even if you’re like me and hate any form of accounting and would much rather outsource it all, there are a number of companies that offer to complete your self-assessment for £120, so about ten times less. 

And please don’t be one of those people who try and do their Ltd company accounts themselves. Trust me when I say this – it’s not worth it. Hire a professional and focus on the higher impact and higher ROI parts of your business! 

In my opinion the accounting and paperwork requirements are the biggest negative to starting a Ltd business. 

So what’s the answer for UK Amazon Sellers?

And there you have it. There are some other pros and cons to both set-ups but they’re not really worth going over and confusing things for the sake of it. We’ve covered all the most important considerations in this article and I guess all that’s left to do is make a final recommendation (as I know I’ll still get a ton of questions about which one is best!). 

Obviously, the real answer is it depends on your personal circumstances – both your current income and future plans for your business. 

If you already have a high paying job and have hit or are close to the higher tax rate, then that means you’ll be paying 40% on all profits you make from your Amazon business. And I know I speak for everyone when I say the idea of doing all this work only to lose practically half my profit in tax just doesn’t sound very appealing. 

So it would definitely be worthwhile looking into a Ltd company. 

If on the other hand you don’t earn as much, or if you work part-time or even if all your income will be coming from your Amazon FBA business, then you get a lot more leeway as a sole trader before you start paying higher than the 19% corporation tax. As we saw in our earlier example it’s around the £60k profit mark which you can use as a rough guide. 

If your total income is lower than that then it’s probably simpler and financially beneficial to operate as a sole trader. 

Registering Ltd does not equal registering for VAT

One final point before we wrap up today’s post – registering a Ltd company does not mean registering for VAT. They’re completely different things and you can register for VAT as either a sole trader or Ltd company.

But as I’ve mentioned many times, there’s very few circumstances where you’d want to do this and I’d recommend holding off for as long as possible and until you reach the mandatory VAT threshold, which is currently £85,000.

You must register for VAT if any of the following apply: 

  • your VAT taxable turnover exceeds the current threshold of £85,000 (for a 12-month period ending in 2020/21). 
  • you expect your VAT taxable turnover to exceed £85,000 in the next 30-day period
  • your business had a taxable turnover exceeding £85,000 over the last 12 months

So until you hit that point, don’t do it! 

And that brings us to the end of today’s post. 

While I’ve done my best to simplify things and give you enough info to make your own decision, I’m not an accountant or qualified tax advisor so if you need more in depth advice or if you have specific tax related questions it’s always worthwhile consulting with a professional. 

As always if you have any questions for me then send them to EMAIL and I’ll personally get back to you. 

Otherwise, until next time! 

All the best,

Andrew.  


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