Tax for Etsy sellers: what you owe and what you can take off
Reviewed by Rob Webb, practising accountant since 2015 · Last reviewed September 2026 · Figures are for the 2026/27 tax yearReviewed by Rob Webb, practising accountant since 2015 · Last reviewed September 2026 · Figures are for the 2026/27 tax yearDo you sell on Etsy? Then you're almost certainly trading, whether you make things or buy them in to sell. Once your sales pass £1,000 in 2026/27, you need to tell HMRC.
The good news? Materials, Etsy fees and postage are all deductible, so you're taxed on what's left, not on what customers paid.
Want to check your own costs? See what you can claim as an Etsy seller →
Yes, in nearly every case. Unlike a general marketplace where people sell off their own belongings, Etsy exists for handmade, made-to-order, vintage sourced for resale and craft supplies. All of those involve acquiring or making with the intention of selling. That is a trade, and you are self-employed the moment you start.
The threshold that matters is the trading allowance: £1,000 of gross trading income in 2026/27, measured across all your trading, before you deduct a penny of costs. At or below £1,000, there is nothing to report on account of it. Above £1,000, you must register for Self Assessment by 5 October following the end of that tax year.
Gross is the trap. £1,300 of Etsy sales with £900 of materials is only £400 of profit, but it is £1,300 of gross trading income, so it must be reported. Once you report, you choose between deducting the flat £1,000 allowance or your actual costs — never both. For most makers, actual costs are far larger, so the allowance is quickly irrelevant.
The government announced in March 2025 that this reporting threshold would rise to £3,000. No commencement date has been published on gov.uk, so £1,000 remains the figure for 2026/27.
Here is a maker with a part-time job and an Etsy shop. The salary is £28,000 and already uses the personal allowance, so every pound of Etsy profit is taxed.
| 2026/27 | |
|---|---|
| Etsy sales received, including postage charged to customers | £26,400 |
| Materials and components used in what you sold | £8,900 |
| Etsy fees: listing, transaction, payment processing, Etsy Ads | £2,100 |
| Postage and packaging | £3,400 |
| Small tools and consumable equipment | £700 |
| Working from home, 101+ hours a month at £26 | £312 |
| Mileage, 600 miles at 55p | £330 |
| Design software and subscriptions | £180 |
| Total expenses | £15,922 |
| Etsy profit | £10,478 |
| Personal allowance | Already used by the £28,000 salary |
| Taxable Etsy profit | £10,478 |
| Income tax at 20% | £2,095.60 |
| Class 4 National Insurance | £0 |
| Total due by 31 January | £2,095.60 |
The working: £26,400 less £15,922 of costs leaves £10,478 of profit. Salary plus profit is £38,478, all within the basic rate band which runs to £50,270, so the profit is taxed at 20% — £2,095.60.
Class 4 National Insurance is nil, and this surprises people. Class 4 is charged at 6% on self-employed profits between £12,570 and £50,270. It looks only at your self-employed profits, not at your salary added on top. Profits of £10,478 are below £12,570, so no Class 4 is due. The salary has its own National Insurance, deducted through payroll.
Class 2 is no longer a compulsory weekly charge. Profits are above the Small Profits Threshold of £7,105, so it is treated as paid at nil cost.
| What you can claim | What to watch |
|---|---|
| Materials and components: fabric, yarn, clay, silver, findings, resin, blanks, ink, vinyl, thread | Claim the cost of materials in goods you have actually sold. Stock and raw materials still on the shelf at 5 April are closing stock, not a deduction yet. |
| Etsy's fees in full: listing, transaction, payment processing, Etsy Ads, Offsite Ads, currency conversion, Etsy Plus | Take these from your Etsy payment account statements. Etsy nets fees off before paying you, so your bank figure is already reduced — using it understates both sales and costs. |
| Postage, tracked and international services, customs handling, and packaging: boxes, tissue, mailers, stickers, thank-you cards | Postage your customers pay you is part of your sales income. Include both the income and the cost, not just one. |
| Printing: care cards, business cards, labels, printer ink and paper | Clearly business printing only. Family photos on the same printer are not. |
| Craft tools and equipment: a heat press, kiln, embroidery machine, die cutter, sewing machine | Equipment with a lasting life is usually a capital allowances claim rather than a straight expense. Keep those invoices separate from consumables. |
| Product photography: lightbox, backdrops, props, a tripod, phone lens attachments | If a prop is also a household item, claim only the business proportion and be able to explain how you arrived at it. |
| Software and digital assets: design software, commercial-use font and graphic licences, mockup templates, shop banner design | Commercial-use licences are a genuine business cost. A personal-use licence used commercially is a licensing problem as well as a tax one. |
| Craft fair stall fees, table hire, public liability insurance, mileage to fairs and suppliers | 55p a mile for the first 10,000 business miles in 2026/27, then 25p. Once you use the flat rate for a vehicle you must stick with it for that vehicle and cannot also claim capital allowances on it. |
| Working from home | £10 a month for 25–50 hours, £18 for 51–100, £26 for 101 or more. There is no flat rate below 25 hours. Phone and internet are excluded and claimed separately on a business-proportion basis. |
Makers buy in bulk. A big order of silver, fabric or blanks in February can wipe out your profit on paper, and it is tempting to deduct the lot.
You cannot. You deduct the cost of materials in the items you have actually sold during the year. What is left over — raw materials, work in progress, finished pieces not yet sold — is closing stock at 5 April, and it carries forward to be deducted in the year the goods are sold.
So the sum is: opening stock, plus everything you bought in, minus closing stock. That is your cost of goods sold, and that is the number that goes on the return.
There is no requirement for a formal inventory system. Once a year, on 5 April, walk round the workspace and write down what you have and what it cost you. Photograph the list. Ten minutes of counting is what turns an eyeballed figure into one you can stand behind.
The second half of this trap is pricing. Sellers who never work out their cost of goods rarely know their margin either, and often discover their hourly rate is well below what they assumed. The same ten minutes fixes both problems.
Online platforms, Etsy included, are required to report seller information to HMRC — your details and what you sold through the platform — once a seller passes the platform's reporting threshold. That is a reporting duty placed on Etsy. It is not a tax assessment and it is not an accusation.
What it does mean is that the figure HMRC holds is your gross sales, before Etsy's fees and before your postage costs. If you report the net amount that reached your bank, your turnover will not match theirs, and a mismatch is what triggers a letter.
So report gross sales as turnover and claim fees and postage as expenses. Same profit, same tax, no letter. If a letter does arrive, it is a request to check your position, not a demand — answer it with your figures rather than ignoring it.
Possibly, and sooner than most makers expect, because the test is on turnover rather than profit.
Qualifying income is gross self-employment turnover plus gross property income added together, before expenses, tested on the previous year's return. Employment income, pensions, dividends and partnership shares are excluded.
The seller in the worked example has £26,400 of turnover and £10,478 of profit. Turnover is what counts, so on those figures they would come into Making Tax Digital from 6 April 2028, with a tax bill of around two thousand pounds. Anyone at or below £20,000 of qualifying income is permanently outside it.
Once in, you keep digital records in compatible software and file quarterly updates covering periods to 5 July, 5 October, 5 January and 5 April, due on 7 August, 7 November, 7 February and 7 May. Each update is cumulative — it restates the year to date, so an error in one quarter is put right in the next rather than amended. The final declaration is still due by 31 January. With turnover under £90,000 you may use simple income and expense categorisation.
If your Etsy sales are £1,000 or less gross, you need nothing from us and nothing from HMRC.
If you are a single-person shop with one income source, tidy records, and no employees or VAT to think about, the Self Assessment return is short and HMRC's free online service handles it. Plenty of makers file their own return every January and there is no reason to pay for that.
Come to us when the picture gets busier: stock valuations you are not confident about, sales across Etsy plus markets plus your own website, a jump towards the £90,000 VAT registration threshold measured on a rolling 12 months, equipment purchases that should be capital allowances, or Making Tax Digital turning one annual job into five filings a year.
Yes. It is part of what the customer paid you, so it is turnover — and the postage you paid out is an expense. Leaving out one side while including the other is the most common error on Etsy returns.
Yes. If gross sales are over £1,000 you must report anyway, and a recorded trading loss can be set against other income or carried forward against future profits. Makers in their first year commonly have a loss worth capturing.
Not this year. Unused materials are closing stock and are deducted in the year the finished goods are sold. This is the rule that most often changes a first-time Etsy return.
The income tax treatment is the same: it is trading income, reported gross, with costs deducted. There is effectively no cost of goods, so margins and taxable profit are much higher for a given level of sales. VAT rules for digital products differ from physical goods and are worth checking before you scale.
It can. If the amount is small you can ask for it to be collected through your PAYE code by filing by 30 December. Otherwise it is paid as a lump sum by 31 January, on top of the tax already deducted from your salary.
Only if they genuinely do the work and are actually paid at a commercial rate, and it must be handled properly through payroll where required. A paper arrangement with no money moving is not deductible.
Filed Tax prepares maker and small-shop returns from your Etsy statements, works out cost of goods sold with you, and files on time. The first month is free. It is £25 a month after that, covering all four Making Tax Digital quarterly updates, the year-end final declaration, unlimited questions and deadline reminders. Rob Webb reviews every return before it is filed.
Rob is a Certified Xero Advisor with a BSc from the University of Salford. Last reviewed September 2026 against GOV.UK guidance current at that date. This guide is general information, not personal tax advice. Figures are for the 2026/27 tax year and can change at each Budget — always confirm the current numbers on GOV.UK or ask us to check your situation.