Tax Guide for Etsy Sellers UK

Etsy has become the go-to marketplace for makers, crafters, artists, and vintage sellers in the UK. What often starts as a hobby, selling handmade jewellery, knitted items, prints, or vintage finds, can quickly grow into a genuine business. And when it does, tax obligations follow.

Many Etsy sellers are unsure about when their hobby crosses the line into a business, what they need to report to HMRC, and what expenses they can claim to reduce their tax bill. This guide answers all of those questions and more, giving you a clear roadmap for managing your tax obligations as a UK-based Etsy seller.

When Does a Hobby Become a Business?

This is the question that most Etsy sellers ask first, and the answer is not always straightforward. HMRC does not have a strict turnover threshold that automatically makes you a business. Instead, they look at the nature and intention of your activities.

You are likely running a business (rather than a hobby) if you:

• Sell regularly rather than just occasionally
• Intend to make a profit
• Have invested in equipment, materials, or marketing
• Treat your Etsy shop as a commercial operation
• Keep business records and manage stock

Conversely, if you sell a handful of items each year with no intention of building a regular income stream, HMRC is unlikely to consider you a business.

The Trading Allowance

The trading allowance provides a useful buffer. You can earn up to £1,000 per tax year from self-employment without needing to register as self-employed or file a tax return. This is your gross income (total sales), not your profit. If you earn more than £1,000, you need to register as self-employed and file a self-assessment tax return.

Alternatively, if your income exceeds £1,000, you can choose to deduct the £1,000 trading allowance from your income instead of claiming actual expenses, whichever gives you the better result. However, for most sellers with significant material costs, claiming actual expenses will save you more tax.

Registering as Self-Employed

If your Etsy income exceeds the £1,000 trading allowance, you must register as self-employed with HMRC. You need to do this by 5 October following the end of the tax year in which you started selling. For step-by-step instructions, see our self-employment registration guide.

Registering is free and can be done online. You will receive a Unique Taxpayer Reference (UTR) number, which you need for filing your tax return.

Do not be put off by the formality of registration. It does not mean you need to start treating your Etsy shop like a corporate enterprise. It simply means you are declaring your income properly and can claim legitimate expenses against it.

Understanding Your Etsy Income

Your income for tax purposes is the total amount customers pay for your products, including any delivery charges you collect. It is not the amount that lands in your bank account after Etsy deducts its fees.

Etsy provides financial statements through your Shop Manager dashboard. These show your gross sales, fees, and net deposits. For tax purposes, you should record:

• Gross sales as your income (including delivery charges)
• Etsy fees as a business expense (listed separately)

This gives you a more accurate picture of your business and ensures you are claiming Etsy's fees as a deductible expense.

Etsy Fees You Can Claim

Etsy charges several types of fees, all of which are deductible business expenses:

• Listing fees: Currently £0.16 per listing (or the sterling equivalent of the per-listing fee)
• Transaction fees: 6.5% of the item price plus delivery
• Payment processing fees: 4% plus £0.20 per transaction for Etsy Payments
• Offsite advertising fees: 15% commission on sales generated through Etsy's offsite ads (if applicable)
• Etsy Plus subscription: If you subscribe to Etsy's premium tools
• Currency conversion fees: If you sell in currencies other than sterling

These fees add up quickly and can represent 15% to 25% of your gross sales, so claiming them is essential for reducing your tax bill.

Allowable Expenses for Etsy Sellers

Beyond Etsy's fees, there are many other expenses you can claim as a UK-based Etsy seller.

Materials and Supplies

The cost of materials used to make your products is your most significant deductible expense. This includes:

• Fabrics, yarn, paper, wood, metal, beads, and other raw materials
• Packaging materials (boxes, tissue paper, bubble wrap, tape)
• Shipping supplies (labels, envelopes, postal tubes)
• Tools and equipment used in production (sewing machines, cutting tools, kilns, printers)

Keep all receipts for material purchases. If you buy materials in bulk and do not use them all within the tax year, you should technically value your remaining stock at year end and adjust your expenses accordingly.

Postage and Shipping

The cost of posting items to customers is deductible, whether you use Royal Mail, Hermes, DPD, or any other courier. Keep records of all postage costs, either through receipts or through your shipping provider's online records.

If you charge customers for delivery, remember that the delivery charge is part of your income. The actual postage cost is then claimed as an expense.

Home Office Costs

Most Etsy sellers work from home, whether it is a spare bedroom turned workshop, a corner of the kitchen table, or a garden shed. You can claim a proportion of your household costs as a business expense. There are two methods:

Simplified method: HMRC's flat-rate allowance based on hours worked from home:

• 25 to 50 hours per month: £10 per month
• 51 to 100 hours per month: £18 per month
• 101 hours or more per month: £26 per month

Actual costs method: Calculate the proportion of your home used for business and claim that proportion of your rent or mortgage interest, council tax, utilities, broadband, and insurance. This is more complex but can result in a larger claim.

Photography and Marketing

Good product photography is essential for Etsy success, and the costs are deductible:

• Camera equipment or a portion of your smartphone cost
• Lighting equipment and backdrops
• Photo editing software subscriptions
• Props used in product photography
• Social media advertising spend
• Business cards and printed marketing materials
• Website costs if you also sell through your own site

Professional Development

Courses, workshops, and books that develop skills directly relevant to your Etsy business are deductible. This might include craft courses, business workshops, marketing training, or relevant subscriptions.

Other Expenses

• Accountancy fees: Including accounting software like Accounted
• Insurance: Public liability, product liability, or contents insurance for business equipment
• Travel: Trips to buy materials, attend craft fairs, or post parcels (if not your local post office)
• Craft fair costs: Table fees, travel, and accommodation for selling at physical events
• Bank charges: Business account fees

For a full list of what you can and cannot claim, see our guide on tax deductions for sole traders.

How Much Tax Will You Pay?

Your tax liability depends on your profit (income minus expenses) and any other income you have. As a self-employed person, you pay:

Income Tax

| Band | Rate | Income Range | |------|------|-------------| | Personal allowance | 0% | Up to £12,570 | | Basic rate | 20% | £12,570 to £50,270 | | Higher rate | 40% | £50,270 to £125,140 | | Additional rate | 45% | Over £125,140 |

National Insurance

• Class 2: A small weekly amount included in your self-assessment bill
• Class 4: 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270

Example

If your Etsy shop generates £18,000 in gross sales and you have £6,000 in allowable expenses (materials, fees, postage, home office), your taxable profit is £12,000. This is below the personal allowance, so you would pay no income tax and only a small amount of National Insurance.

If your profit were £20,000, you would pay income tax of 20% on £7,430 (£20,000 minus £12,570) = £1,486, plus Class 4 NI of 6% on £7,430 = £445.80.

VAT for Etsy Sellers

If your total taxable turnover exceeds £90,000 in any rolling 12-month period, you must register for VAT. For most Etsy sellers, this is not an immediate concern, but if your business grows rapidly, keep an eye on your turnover.

It is important to note that Etsy collects and remits VAT on its own fees for UK sellers. You do not need to account for VAT on Etsy's fees unless you are VAT registered and using the reverse charge mechanism.

If you do register for VAT, either because you must or because you choose to voluntarily, you will need to charge VAT on your sales and submit quarterly VAT returns. Our VAT registration guide explains the process and considerations.

Selling Internationally

Many Etsy sellers sell to customers outside the UK. This introduces additional considerations:

EU sales: Since Brexit, sales to EU consumers may be subject to import VAT and customs duties in the destination country. Etsy's tax collection policy means Etsy now collects and remits VAT on behalf of sellers for orders shipped to EU countries, simplifying compliance for most sellers.

US sales: The US has no equivalent of VAT, but individual states have sales tax. Etsy collects and remits state sales tax on behalf of sellers.

Currency: If you receive payments in foreign currencies, you need to convert these to sterling for your tax return using the exchange rate on the date of the transaction or an average rate for the period.

Record Keeping

You must keep records of all income and expenses for at least five years. This includes:

• Etsy financial statements and payment records
• Receipts for all material purchases
• Postage receipts
• Bank statements for your business account
• Records of home office calculations
• Stock records if you hold significant inventory

Good record keeping is not just about compliance; it helps you understand which products are profitable, where your money is going, and how your business is performing. Our guide on self-assessment walks you through the filing process.

Making Tax Digital

Making Tax Digital for Income Tax Self Assessment applies to sole traders with qualifying income above £50,000 from April 2026. If your Etsy income, combined with any other self-employment income, exceeds this threshold, you will need to keep digital records and submit quarterly updates to HMRC.

Even if you are below the threshold, using digital tools now will make your life easier and prepare you for when the threshold drops in future years. Check our guide on Making Tax Digital for the full picture.

Common Mistakes Etsy Sellers Make

Not declaring income above the trading allowance. HMRC now receives data from online platforms under DAC7 reporting rules. They know you are selling.

Forgetting to value closing stock. If you buy materials in bulk, only the cost of materials actually used in products sold during the year is deductible. Materials sitting in your workshop at year end are closing stock, not an expense.

Mixing personal and business finances. Open a dedicated business bank account. It makes everything simpler.

Not claiming all legitimate expenses. Many sellers forget about home office costs, phone bills, software subscriptions, and craft fair expenses. Every unclaimed expense increases your tax bill unnecessarily.

Waiting until January to sort out tax. Start keeping records from day one. The HMRC guidance on record keeping is clear and straightforward.

Tips for Etsy Sellers

Separate your finances. Open a dedicated business bank account and use it for all Etsy-related transactions. This makes record keeping dramatically simpler.

Save for tax. Set aside 20% to 30% of your profits each month. Do not spend everything that lands in your account; a portion belongs to HMRC.

Track your time. If you claim home office costs using the simplified method, you need to record the hours you spend working from home. Keep a simple log.

Value your stock. If you hold significant inventory at year end, calculate its value. This affects your profit calculation and your tax bill.

Get help when you need it. Tax does not have to be complicated. Accounting software can automate much of the process, and a good accountant can save you far more than their fees.

Your Etsy shop is a creative endeavour, but it is also a business. Treating the tax side with the same care and attention you put into your products will protect you from penalties, reduce your tax bill, and give you a clear picture of how your business is really performing.

Ready to simplify your Etsy accounting? Sign up for Accounted and let Penny handle the bookkeeping while you focus on creating. From receipt scanning to tax calculations, everything you need is in one place.

Useful Resources

• running a limited company
• Health and Safety Executive guidance

Accounted is built for UK sole traders — bookkeeping, tax, and MTD compliance in one place. See how it works →