The dropshipping business model has exploded over the past few years. This has allowed more people than ever to enter the eCommerce world and create their own income. The accessibility of dropshipping is one of the major advantages of the business model, meaning budding entrepreneurs can set up and begin selling in a relatively short period of time.
However, a large question remains – do you need to pay tax on dropshipping income? This article will take a look at the issue of dropshipping tax in the UK. Helping you to gain an insight into how the system works and what you need to pay.
Dropshipping Tax In The UK
So, first of all – do you need to pay tax on dropshipping income in the UK? Well, unfortunately, the answer is yes. The tax system in the UK is quite complicated and has various subsections to be aware of. But don’t worry – we’ll break it down for you.
How to pay taxes when dropshipping can seem daunting at first – but the best way to think about it is in two sections; Income Tax and VAT/Customs Duty. Let’s take a look at each one individually.
Dropshipping Income Tax
The first type of tax you need to be aware of is income tax. This tax is collected by the UK government and is calculated as a percentage of the money you earn. Now, this is where it gets a little confusing – the UK has a ‘banded’ system. Each band has its own specific tax percentage. These bands are as follows:
- 0% tax on income up to £12,500 per year
- 20% tax on annual income earned between £12,500 and £50,000
- 40% tax on annual income earned between £50,001 and £150,000
- 45% tax on annual income earned over £150,000
So, if your income is less than £12,500 in the tax year (from April to April), you do not have to pay any income tax. However, a key point to note is that this £12,500 relates to your total personal income, not just from dropshipping. So say that you work part-time and run a dropshipping business on the side; your combined earnings for both will be defined as your income. So just make sure you know exactly what you are bringing in, and what you have to pay.
But what do the other bands mean? Well, if you earn between £12,500 and £50,000 in the tax year, you will have to pay 20% of your income between these amounts as tax. For example, say you earned £20,000 for the year – you would pay 20% tax on £7500, as you always get £12,500 as a ‘tax-free allowance’. So, your tax for that year would only be £1500, or £125 per month. To pay your required taxes, you must file a personal tax return each year; this can be done yourself, or by hiring an accountant to help.
A final point to note is that tax rates for people based in Scotland are separate from the rest of the UK; the system still works the same, but the percentages and amounts differ slightly. The exact figures can be found below:
- 0% on income up to £12,500 per year
- 19% on annual income earned between £12,501 and £14,549
- 20% on annual income earned between £14,500 and £24,944
- 21% on annual income earned between £24,945 and £43,430
- 41% on annual income earned between £43,431 and £150,000
- 46% for income over £150,000
VAT and Dropshipping
The second area of tax to be aware of is VAT. Dropshipping VAT in the UK refers to the tax that is paid based on the value of the goods being sold. This tax is also referred to as sales tax in the US and some other countries. It is essentially the same thing.
Unfortunately, the VAT rate is set at 20% of the value of the goods; so if you sold an item for £20, you would have to pay £4 in VAT. When dropshipping, most people would just raise the price of their product to £24 to absorb this tax; however, this can affect conversion rates, so just be wary.
Now, Brexit has changed the rules surrounding VAT recently. The key point to be aware of is that you don’t need to worry about VAT if your income as an individual is less than £85,000 per year. If you earn more than this threshold, you must register for VAT within the UK. This is relatively simple to do, and can be completed online. At the end of the process, you will be given a VAT number which actually allows you to claim back VAT on various business expenses. This VAT number must be entered both on your website, and on Contrado’s site, for tax purposes.
Importantly, if you do have to pay VAT, this must now be paid at the point of sale (POS). All this means is that it is your responsibility to collect this when you make a sale. Whether that be through Shopify, PayPal, Klarna, etc. However, if you use Contrado’s dropshipping service, we include this VAT in the price when dispatching to locations within the UK.
Dropshipping Customs Duty
Customs duty is another form of tax that must be paid on goods entering the UK. The rate of tax for customs duty is 2.5% of the cost of the item; however, special rates apply for items that cost more than £630. Importantly, this tax does not have to be paid on goods that are valued at less than £135. This value is defined as the packaging plus the items that are inside; so it’s wise if you selling more expensive items to send them in separate packages to make use of customs duty relief.
At Contrado, all of our goods are produced and shipped within the UK – so if you are a UK-based dropshipper, partnering with us means you avoid paying these customs duties entirely. Furthermore, if you are based in the EU, we actually cover these customs duty payments ourselves. So you don’t need to worry about them. Finally, if you operate in the US, we also cover customs duty payments; in addition, we use Fedex Express or DHL as our distribution partners, which means you get to benefit from incredibly fast shipping times too!
In summary, dropshipping tax in the UK is something that everyone must be aware of to conduct business appropriately and legally. Income tax, VAT, and customs duty are the main areas that dropshippers must understand so that they can price their products accordingly.
If you are interested in dropshipping, why not check out our dropshipping service? We make it incredibly easy to get started – you can be set up in minutes! All our goods are made in the UK, meaning you and your customers get to benefit from quality products and fast shipping times. Check out https://www.contrado.co.uk/drop-shipping and start your dropshipping journey today!