There are many different options available for when you want to register/set-up a new eBay and/or eCommerce business, some are very simple and free while others involve a lot of paperwork and some cost.
The main options for people in the UK are:
- Registering as a sole trader (also known as being self-employed);
- Registering as a limited company;
- Registering as a business partnership (this is basically the same as being a sole trader but for multiple people).
The structure you choose will affect many things, including how and what tax you have to pay, the profit you can personally keep, the paperwork you must fill in and also your personal responsibility for the business.
With roughly ¾ of businesses in the UK having only one employee, sole trading is by far the most popular option – especially for new start-ups. This is due to the very easy registration process, simple tax rates, and little paperwork needed. Plus as a sole trader, you get to keep all the profit your business makes after you’ve paid tax!
Compare this to a limited company, which is an organisation you set up to run your business. Any profit made after paying corporation tax is shared between its shareholders.
There are also numerous legal responsibilities involved with running a limited company or being the director of a limited company;
Every financial year (which for limited companies runs from 1 April to 31 March), the company must:
- Send HMRC a Company Tax Return;
- Send Companies House an annual return;
- Put together statutory accounts – which must include a balance sheet, a profit and loss account, notes about the accounts, a director’s report and an auditor’s report.
So as you can see – there is a LOT of paperwork involved with running a limited company! You’ll almost certainly need to hire an accountant just to keep up with everything. That’s why I always suggest registering as a sole trader unless you have a very strong reason not to… and for 99%+ of people, it will be by far the best option.
Sole Trader Overview
Being a sole trader means you’re running your business as an individual (you can still hire staff though) and you have complete control over the way it’s run plus all the profit your business makes is yours to keep after you’ve paid tax.
However when running a business as a sole trader, you’re also personally responsible for any losses your business makes or any outstanding bills in the name of your business and you have to ensure you keep full records of your business’ sales and spending.
This unlimited liability basically means that there is no legal distinction between you and the business, so if it fails and you stop trading, you’ll still be responsible for any debts.
This of course shouldn’t be a problem, as for most people looking to start a low-risk business it’s very unlikely you’re going to build up big debts, but just something to be aware of.
Registering as a Sole Trader
You need to register for Self Assessment with HMRC (HM Revenue and Customs) as soon as possible after starting your business. Technically you won’t be charged a fine unless you register later than 5 October in your business’ second tax year (the tax year for sole traders is from 5 April – 6 April) but to be safe – just register straight away to avoid any potential problems.
You can register on the phone by calling HMRC’s ‘Newly Self-Employed Helpline’ on 0300 200 3504, you can register online through HMRC’s Online Services or you can print and complete the form CWF1 and send it via post to the National Insurance Contributions Office – whichever way you prefer, though online is generally easiest/quickest.
When registering you’ll need to provide some information which includes:
- Personal contact details – name, date of birth, address, telephone number, email etc.
- Business details – nature of your business, business name*, start date of your self-employment, business address and business telephone number.
- Your National Insurance Number
*You can choose to trade under your own name or you can select a business name to trade under. There are some rules as to what you can use for a business name though, as you can’t:
- Use any misleading terms such as Limited, Ltd, public limited company, plc or anything else that might mislead someone as to the structure of your company.
- Use a name that suggests a connection to a government organisation.
- Use a name too similar to an established business in the same niche/area as your business or a name too similar to a registered trademark.
To find out if a UK, European or International trademark is identical or similar to the name you’re thinking of using, you can use the search function on the Intellectual Property Office website:
Bear in mind that if you do decide to use a trading name, you still have to display your own name on any business stationery (letterheads, business cards etc.), invoices or business letters.
Once you’ve registered for Self Assessment with HMRC you’ll receive a Unique Taxpayer Reference (UTR) number which you’ll use to send your yearly tax return.
Yearly Tax Return
Completing a yearly tax return is pretty much the only paperwork you need to complete as a sole trader and it’s actually very simple and straightforward to do – as long as you’ve kept details of your business’ income and expenses, which you should of course be doing anyway.
You’ll need these records to fill in your tax return form and you may need to send these documents to HMRC if they ask for them (though they rarely do).
Unlike with an Ltd company, there are no rules on how you have to keep your records – you can keep digital records, have them as part of your accounting software or even written on paper – as long as your records are accurate, complete and legible, that’s fine!
If you’re registered for Self Assessment, HMRC will send you a letter each year (usually in April or May) asking you to send your yearly tax return for the previous year.
You’ll need to complete the main tax return form (SA100) to give basic details about yourself (name, address, straightforward income etc.) as well as any ‘supplementary pages’ to give info on other income, for example – employment income (SA102), property income (SA105) and income from self-employment.
The self-employment pages you need depend on the amount of your turnover:
- If your annual business turnover was below £77,000 then you need to complete supplementary page SA103S and if it was above £77,000 then you need supplementary page SA103F.
Now I know this may seem a little complicated and confusing but trust me, it’s not! The forms come with all the guidance notes you need and the info they ask for is all very simple and straightforward… once you’ve completed one you’ll realise just how easy it is!
If you want to have a look at the forms, here are links to the main form (SA100) and the additional self-employment page (SA103S):
SA100 – http://www.hmrc.gov.uk/forms/sa100.pdf
SA103S – http://www.hmrc.gov.uk/forms/sa103s.pdf
Remember, the tax year for self-employed people runs from 6 April – 5 April the next year.
E.g. in April/May 2014 HMRC will send you a letter asking for a completed tax return for the year April 6 2013 – April 5 2014.
The final dates for sending your tax return depends on whether you do it online or via post but either way you have plenty of time as the deadlines are:
- 31 October 2014 – paper tax returns
- 31 January 2015 – online tax returns
And then the deadline for actually making payment on any tax owed is January 31st 2015.
There are penalties for sending your tax return late, so make sure you do it on time! You are given plenty of warning, so there’s no excuse to be late which will lead to you getting a £100 fine if it’s less than 3 months late and additional penalties of £10/day if it’s more than 3 months overdue.
And if you pay late, you’ll be charged the late penalties plus 3% interest on the amount owed.
Just don’t let that happen to you and send it in on time!
Tax Amounts & Personal Allowance
How much tax do you actually have to pay? A very important question of course which I’ll cover now as I get a lot of emails from people confused about the actual amounts.
The first thing you have to know is that tax is only paid on taxable income above your personal allowance.
What is a personal allowance? It’s simply a set amount that you’re able to earn each year before you have to pay any tax!
Your personal allowance depends on your date of birth and your total income that year. Total income means all taxable income (earnings, pension, interest on savings etc.).
Currently, personal allowance is set at:
What is income limit and how does it change your personal allowance?
Basically if your adjusted net income is over the income limit, your personal allowance is reduced by half the amount you earn over the limit. I.e., for every £2 over the income limit you earn, your personal allowance is reduced by £1.
But, very importantly – if you earn more than £26,100 but less than £100,000 your personal allowance cannot go below £9,440 as that is the basic allowance.
If you do earn more than £100,000 then your personal allowance can potentially be reduced to zero – depending on how far over the income limit you are.
Here are three quick examples to help you understand how this works:
John, born between 5 April 1938 & 5 April 1948, income of £27,100
According to the table above, John’s income is £1,000 over the income limit so his personal allowance is reduced by half of that – i.e. £500. So from £10,550 it becomes £10,050.
Peter, born between 5 April 1938 & 5 April 1948, income of £56,000
Peter’s income is £29,900 above the limit so his personal allowance should be reduced by half of that which would make it zero… however as Peter earns less than £100,000 his personal allowance cannot go below the basic rate of £9,440.
Jane, born after 5 April 1948, income of £125,000
Jane earns £25,000 above the income limit of £100,000 so her personal allowance should be reduced by £12,500 (half of £25,000) which puts it at zero. And as her income is above the £100,000 mark there is no minimum basic allowance so it stays at zero.
Again, this may seem overly complicated at first but is actually very simple and easy to work out – once you’ve understood the slightly weird system used!
Now, onto the most important point, the actual amount of tax you must pay HMRC on your business’ profits!
At the moment, there are three tax rates / brackets – Basic, Higher and Additional.
Here is the amount of tax you have to pay on income above your personal allowance:
But remember, income is only calculated after removing your personal allowance.
So let’s say you earn £35,000 and your personal allowance is £9,440 – you only pay 20% tax on £25,560 (£35,000 – £9,440).
If you earn £9,000 and your personal allowance is £9,440 then you won’t pay anything as your taxable income is zero.
As you can see from the table above, personal income tax is quite reasonable up to £32,010 but any profit above that is taxed at 40% which is a very steep increase!
My personal recommendation is; once you reach the point where your annual business profit passes the 40% threshold, you should start looking at registering as a Ltd Company so that you pay Corporation Tax instead of Income Tax.
At the moment, Corporation Tax is set at 20% for profits of up to £300,000 and while it generally wouldn’t be worth the hassle and cost of setting up a company when first starting out; at this point in your business when you’re making good money, you can start to consider some other options that wouldn’t have been beneficial or cost-effective before.
How to Pay Your Tax
There are a number of ways you can pay your Self Assessment tax bill, including: by debit or credit card, by Direct Debit, through your bank or Post Office and by post.
Just make sure that you allow enough time for the payment to go through before the deadline, so you don’t get fined.
As well as income tax, there is something else you need to pay to the government – National Insurance. Again, the exact amount depends on the annual profits from your business.
National Insurance is split into two parts – Class 2 & Class 4, and the rates for self-employed people differs slightly to normal but basically; you pay Class 2 National Insurance if you earn above £5,725 a year and pay Class 4 National Insurance if you earn more than £7,755.
The exact amounts are:
*To not pay Class 2 NI, you’ll need to apply for an exception, which is sometimes called a ‘Certificate of Small Earnings Exception (SEE)’.
To apply, you need to complete the form CF10: http://www.hmrc.gov.uk/forms/cf10.pdf
So as you can see from the above table, National Insurance payments are not that high and only really start if you’re earning over a certain amount, and while nobody wants to pay tax for no reason – National Insurance does contribute to your pension entitlement so it’s worth it in the end!
Class 2 NI is paid via direct debit and Class 4 NI is paid along with your income tax through your Self Assessment Tax Return.
VAT (Value Added Tax)
You’ll notice that I haven’t yet mentioned VAT, and the reason for this is very simple – as I’ve already covered in a previous blog post, you SHOULD NOT register for VAT until it’s absolutely necessary.
You have to register for VAT once your turnover goes over the threshold (or if you know that it will). Currently the threshold is £79,000 (it generally goes up every year) and is calculated by your VAT taxable turnover, i.e. the total of everything sold.
But as already mentioned, I strongly suggest keeping away from VAT registration for as long as you can!
What if I already work full time?
One thing that always seems to confuse people and something I get a lot of emails about is how does registering as a sole trader differ if you’re already employed?
Well the basic answer is – it doesn’t.
The only difference is; when you fill in your Self Assessment tax return at the end of the year, you’ll have to also include the income you earned from your job – that’s it! Everything else remains the same, the two are pretty much separate and your employer won’t know about your business.
The main thing you have to consider if you want to start a business when you’re already working is your personal allowance and tax rates… as tax rates are calculated on your TOTAL INCOME, which means the salary from your job plus any profits from your business.
As mentioned above, once you pass the 40% threshold (currently £32,010) then you should start looking at registering your business as a Ltd Company which means you’ll pay corporation tax which is only 20% up to £300,000.
So I think that’s everything! I hope you find this guide useful in deciding how to register as a sole trader, and don’t be put off at all if it everything seems a bit complicated/too much of a hassle – it really isn’t and is actually incredibly simple and easy.
Of course I’m always happy to help if you have any further questions, but at the same time I am not an accountant and if your situation is very specific or you want to find out more about registering a Ltd company or registering for VAT – I always recommend speaking to a professional as they’ll have the working knowledge to give you the advice you need.
Most accountants will allow a half hour to one hour initial consultation free of charge, so don’t be afraid to speak to someone locally if you need more help.
That’s it from me for now!
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Hi, so i’ve met the 81,000 threshold according to ebay. My total sales globally states this. I just wanted to know as this is my 1st year self employed and really haven’t been keeping an eye on things. Is this figure to be trusted? I mean, don’t refunds/returns need to come out of this figure. At a guess, 30% of my sales are returned and refunded. Please help, I don’t really want to be VAT registered or do I???
No, returns and refunds are not taken out of your gross revenue figure so yes – it seems that you have reached VAT threshold and need to register now.
I wannt to know that If I am full time employed and earning 19000/year plus I register for Sole Trader but do not sell anything , will I still need to pay self-employed national insurance contributions or no ? thanks
I’m not sure, you should contact HMRC and ask them about this.
Just one quick question on Insurance. My wife has registered as a sole trader with HMRC and is starting an ebay Business account. She has asked if she needs any Insurance (Product Liability or Public Liability). She is planning on possibly holding a little stock, but the bulk of her items will be dropshipped from suppliers.
Thanks for your comment.
Yes, by law she is required to have Product Liability Insurance.
I bought your EAB disc a couple of years back and have finally started importing and selling on ebay.
I’ve been doing it for a couple of months now so I’m about to register with HMRC.
I’ve created an Excel spread sheet which lists every sale, postage, cost of goods, fees etc and a profit figure at the end.
My question is, am I over-thinking this? should I record every single sale or say, just the weekly/monthly total?
Its not so bad at the moment but if it gets into the hundreds of sales a day range I think I would be spending more time on the spreadsheet than on selling.
You need some kind of record for each sale BUT you want to start using bulk exporting options – export sales from eBay & payments from PayPal via CSV files, once a month. And then organize them in a spreadsheet. This way you don’t have to manually “record” each transaction.
Thanks Andrew, that’s good advice as always, I’ll start doing that – it’ll probably be more accurate too!
It’s a great website, which answers many of questions. I have some as well. I know it might be stupid, but I’m really new in it. I’m just about to start selling stuff on eBay. Now doing some research on what I can sell. I wonder when I need to register myself as self employed. At the moment I want to try with few things I’ve just ordered and I won’t make a big money on it. The second thing, I bought the stuff from China, but it’s just few things. When I need to pay custom? And how?
Thank you very much for your answer.
Thanks for your comment.
Basically, you want to register as a sole trader as soon as you decide that you want to run a proper business – be it online or offline.
As for VAT & import duty on imports – if goods are sent via the courier, they will inform you about taxes you need to pay and will send you an invoice before (usually) or after goods are delivered.
Great work on the website. Can you help me with something please? I have an ebay account (with my Paypal connected to it) as a private seller. I have great feedback and we now want to register as a business seller with my wife selling clothes as part time employment. I earn in the 40% tax range, but my wife earns significantly less (well below the 40% range). So here are my questions…
Do we (Can we?) change my account over to a business account with my wife’s name as the business? And then register her with HMRC? Is this allowed even though the ebay/paypal accounts are in my name. Needless to say, I am happy for her to do this.
Many thanks in advance.
Yes, I think that is possible.
When you upgrade your eBay account to business, you can enter new business name, address which can then reflect your wife’s name OR business name she registers.
As for PayPal side of things, I think it will be easier just for her to open up a new PayPal business account and then link it to your eBay account.
Thank you for this post which I was directly by you to answer my previous question. It helps a lot seriously! I am also glad, from your reply post, to know that you can wait a few months to register the business to allow some trying time. It has been bothering me for a while since I am not registered and I thought I was trading illegally…. what a relief. So back to my another confusion. Not quick related to business but to the tax. So for example, if I earn 55,000, meaning I am in the 40% category. But I am confused of the actual amount of tax I should pay a year, is it 40%*(55000-9440)=18224? or 40% only apply to the amount above 32,000 after 9440 deduction? Thanks
Yes, 40% apply only to amount above 32 000 after deduction, yes.
Thanks a lot.
Can you recommend a bank from which to open business account for start-up? Preferably no fee is required.
I am still a bit confused about the book keeping. You said we can use whatever way to keep record, but don’t we need bank statements or any proof of each transaction? But this is also not practical What if I used cash? what if I buy things from China using a bank card/account opened in China? what if I sometimes used my personal bank card? How can I prove every transaction if I were asked to show them?
And about NI number, I’ve already got one for my current employment. Shall I give HRMC the same one if I want to register a business? And won’t this somehow be known to my current or future employer? coz I have no intention, as least in the near future, to leap into full time self-employment.
sorry for so many questions.
With questions like these, you want to get accountant’s help (I’m not one).
There’s a reason why I completely outsource accounting, lol
[…] is even more important for sole traders as covered in this blog post, a sole trader is personally responsible for all business liabilities. So it’s not even a matter […]
Brilliant website and very useful info.
I am thinking of starting an eBay business on the side. I have a full time job and earn over 40k but under 100k. My wife earns under 30k. Is it better, in terms of the tax, for my wife to register as a sole trader?
Yes, absolutely! She should register as a sole trader (not you) and take advantage of 20% tax on income to certain limit. Once you reach that, then you can register a Ltd. company.
Thanks for the reply Andrew.
The tax and self employment element is the thing that’s bugging me. I have purchased a few “lots” of products and am awaiting delivery now before creating ebay listings and am also considering selling at car boot sale as well. Would you recommend diversifying like this? Presumably all revenue including the takings from the car boot sale should all be included?
The items I am looking at will be relatively low value and it seems a lot of hassle to then pay 40% immediately to the tax man…
Am I sounding too negative??
Just try it out first. You don’t have to register as sole trader from day one – so essentially you can try this whole thing out for a few months and see whatever you like it, whatever you can make money & whatever it’s worth the hassle of becoming a sole trader.
Just keep all the records of your business e.g. invoices, receipts so you can book them later on when you register.
Thanks for the advice Andrew. I could probably do with purchasing the EAB programme at some point too!!!
If my income from employment exceeds the threshold for paying 40%, is it worth setting up the business as a limited company to pay the 20% corporation tax even if I am expecting only a relatively small profit (given the fees and paperwork involved in setting up a limited company)?
Thanks for your comment.
In the beginning, you can probably just register as sole trader, if you expect a very low profit. And then, later on register a Ltd. company when your profit picks up.
It’s really not worth having an Ltd. company if you just make 50 or 100 quid per month. (unless you can take care of all the documentation on your own).
Firstly, thank you for creating this website. You have cleared up so many things for me and the above article has really helped me understand the taxation angle via HMRC!
I have recently been made redundant and was hoping to set up an eBay shop selling comic, tv and retro memorabilia and gifts). Please can you help me with some advise as stupid as this may sound, as I’ve been getting mixed messages (and wish to stay on the right side of the law)?
If I register as a ‘business’ on eBay, will I be charged VAT directly by eBay immediately, or do I manage this by myself via HMRC? Ebay asks me for a VAT number but I presume that this is to contribute with lower fees? I already have a personal eBay account but was hoping to keep the business site separate for clarity.
Thanks for your comment.
You DON’T want to register for VAT at this stage. In fact – you can totally ignore VAT for now. Read more about VAT issue here:
eBay will charge you VAT on fees, that’s perfectly fine. You DON’T have to provide eBay with VAT number, that’s optional. Just leave that field empty.
Hope this clears it up!
Thanks Andrew for clearing that up for me. So relieved!
Have a fab day 🙂
You’re welcome Tracy!
Loving the website, just wondering if I could pick your brain?, I work as a carpenter on a self employed basis and company’s i sub contract to deduct my 20% tax! , I want to register as a company/sole trader for tax for online sales , but I wanted to try and keep this separate to my carpentry work, does anyone know if this is possible?
Thanks for your comment.
You can only be Sole Trader ONE TIME – meaning that if you’re already registered as a sole trader, you can’t register for it again, for the 2nd business.
So you can either take online sales under the roof of your current set-up OR open up a Ltd. company if you want to separate these two businesses completely.
Another great post 🙂
You mention there’s no difference if you’re already employed, regarding tax returns, but if you already qualify for the 40% threshold from your J.O.B, then would you recommend starting a Ltd company straight away even if you’ve no experience of running your own business?
Thanks for your comment.
IF you plan to make profit from day one, then yes – Ltd. is the way to go.
Who wants to pay 40% tax on profits? That’s simply too high.
Great post and very informative !
One thing i would like to ask is that if you setup a Ltd company does that automatically mean you have to pay VAT ?
Great to hear you find my post valuable!
NO, when you register as a Ltd. company, it DOES NOT mean you automatically register for VAT. These two things are separate. You can have an Ltd. company which isn’t VAT registered.