Your Shopify dashboard says you turned over £40,000 last quarter. Your bank balance says something very different. That gap is where most ecommerce businesses quietly lose money, and it almost always comes down to one thing: you are looking at revenue, not margin.
A headline "30% margin" means nothing until you have stripped out the cost of goods, the platform fees, the payment fees, the VAT, the shipping and the returns. Do that properly and a product you thought was making £9 a unit can turn out to make £1.40, or lose you money on every sale you "win" through a discount.
This guide shows you how to work out your real ecommerce profit margin in the UK. We will cover the three margins that actually matter, walk through contribution margin (the single most useful number for an online seller), and show you how to get to true net profit after fees, VAT and tax. Every tax figure here is dated and sourced from gov.uk.
What is a profit margin, really? {#what-is-margin}
A margin is simply profit expressed as a percentage of revenue. The trap is that there is no single "profit", so there is no single margin. There are layers, and each one strips out a different set of costs.
Most sellers quote a gross margin and stop there. But gross margin ignores the fees that come out after the sale: the referral fee, the payment processor, the VAT you collect and hand to HMRC, the cost of shipping and the cost of the order that comes back as a return. By the time all of those land, your real margin can be a fraction of the headline.
The point of this guide is to get you from a comforting headline number to the number you can actually bank, then spend.
Gross, contribution and net: the three margins that matter {#three-margins}
Think of profit in three layers. Each answers a different question.
| Margin | What it strips out | What it tells you |
|---|---|---|
| Gross margin | Cost of goods sold (the product itself) | Whether your pricing covers what the product cost you |
| Contribution margin | Cost of goods plus all variable per-order costs (fees, payment, shipping, packaging) | Whether each sale actually contributes cash to the business |
| Net margin | Everything above plus fixed overheads and tax | What is genuinely left as profit |
Gross margin is where most people start, and it is the least useful for an online seller. It tells you the product is priced above cost, but it says nothing about whether the sale makes money once the platform has taken its cut.
Contribution margin is the one to live by. It answers the question that matters on every single order: after I have paid everything that varies with this sale, how much cash does it put in the business? Net margin then tells you what survives after the rent, the software subscriptions, the salaries and the tax.
What is contribution margin and why does it matter most? {#contribution-margin}
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Contribution margin is your selling price minus all the costs that vary with each unit sold. It is the cash each sale "contributes" towards covering your fixed costs and, beyond that, profit.
For an ecommerce seller, the variable per-order costs typically are:
- The product itself (cost of goods sold).
- The marketplace or platform referral fee (for example, an Amazon, eBay or Etsy selling fee).
- The payment processing fee (Stripe, PayPal, Shopify Payments and similar).
- Outbound shipping and packaging.
- The VAT you have to hand over on the sale, if you are VAT registered.
- A share of expected returns and refunds (more on this below).
Strip all of those out of your selling price and what is left is contribution per unit. Divide that by your selling price and you have your contribution margin percentage.
Why does this matter more than gross margin? Because it is the number that tells you whether scaling up will make you richer or poorer. If a product has a thin or negative contribution margin, selling more units just loses you money faster, no matter how healthy the gross margin looked. We see this constantly with sellers chasing revenue on hero products that quietly drain cash.
How do platform fees and VAT eat into your margin? {#fees-and-vat}
Two costs do the most damage to ecommerce margins, and both are easy to under-count: platform fees and VAT.
Platform and payment fees stack. A typical UK ecommerce order can carry a marketplace referral fee, a fulfilment fee if you use something like Amazon FBA, and a payment processing fee on top. Each is a percentage of a different base, so they compound. And since 1 August 2024, Amazon charges 20% UK VAT directly on its seller fees to UK-established sellers, which you reclaim as input tax in Box 4 of your VAT return if you are VAT registered, but which is a real added cost if you are not. We cover that change in detail in our guide to VAT on Amazon seller fees.
VAT is the cost sellers most often forget belongs in the margin. Once your VAT taxable turnover passes the registration threshold of £90,000, in force since 1 April 2024, you must register for VAT (gov.uk VAT registration thresholds). From that point, the standard rate of 20% (gov.uk VAT rates) is built into your prices on standard-rated goods. If you sell to UK consumers who cannot reclaim it, that VAT comes out of your price, not on top of it, unless you raise prices.
Here is the part that catches people out. On a £30 standard-rated sale, the VAT element is not £6. It is £30 divided by 6, which is £5, because the £30 you charge already includes VAT at one sixth of the gross price. That £5 was never yours. It belongs to HMRC, and it must come out before you call anything profit.
If you are on the Flat Rate Scheme, the maths differs again. You pay HMRC a fixed percentage of your gross turnover and generally cannot reclaim input VAT on purchases, including most platform fees (VAT Notice 733). For some sellers that is simpler and cheaper; for others, especially those with heavy FBA and advertising costs, standard accounting recovers more. It is worth modelling both before you choose.
Worked example: the true net margin on one product {#worked-example}
Illustrative example. Priya sells a homeware product through her own Shopify store. She is VAT registered in the UK on standard accounting. Her headline gross margin looks healthy, so let us follow one £30 sale all the way down.
| Line | Amount |
|---|---|
| Selling price (VAT inclusive) | £30.00 |
| Less VAT to HMRC (£30 / 6) | -£5.00 |
| Net revenue (yours) | £25.00 |
| Less cost of goods | -£9.00 |
| Gross profit | £16.00 |
| Less payment processing (around 1.9% + 20p on £30) | -£0.77 |
| Less shipping and packaging | -£4.50 |
| Less advertising allocated per unit | -£3.00 |
| Less returns provision (around 6% of net revenue) | -£1.50 |
| Contribution profit per unit | £6.23 |
So a product that shows a £16 gross profit, a gross margin of 64% on net revenue, actually contributes £6.23 once you account for the fees, shipping, ads and returns that vary with the sale. That is a contribution margin of about 25% on net revenue (£6.23 / £25.00), or roughly 21% on the £30 gross price.
The arithmetic checks out: £25.00 net revenue minus £9.00 minus £0.77 minus £4.50 minus £3.00 minus £1.50 equals £6.23. That £6.23 is what each sale contributes towards Priya's fixed costs (her Shopify subscription, software, any staff) and, after those, towards profit and tax.
The lesson is not that Priya's product is bad. £6.23 a unit at volume is a real business. The lesson is that the number she can plan around is £6.23, not £16, and certainly not the £30 on the dashboard.
How do returns, discounts and ad spend change the picture? {#returns-and-ads}
Three things quietly turn a healthy contribution margin into a thin or negative one. None of them show up in a basic gross margin calculation.
Returns are a full reversal of the contribution, not just a refund of the product. When an order comes back, you lose the sale, you often eat the outbound and return shipping, and the item may be unsellable. A 10% return rate does not cut your profit by 10%; it can cut it by far more, because each return also carries the fees you already paid. Building a returns provision into your per-unit maths, as in the example above, keeps you honest.
Discounts come straight off contribution, pound for pound. A 20% discount code on a product with a 25% contribution margin does not leave you with 5%. Because the discount comes off the top line while your fees and costs stay the same in cash terms, it can wipe out almost all of your contribution. Always model what a promotion does to contribution, not to revenue.
Ad spend is the variable cost most likely to push a sale underwater. If your blended advertising cost to acquire a sale rises above your contribution margin, every order you "win" loses money. This is why contribution margin, not gross margin, is the number to set your maximum cost per acquisition against.
How does tax affect your real take-home? {#tax}
Contribution margin gets you to cash generated per sale. Net profit and your personal take-home depend on your business structure and the tax that sits on top.
If you trade as a sole trader, your profit (revenue minus allowable business costs) is taxed through Self Assessment. For 2026/27 the personal allowance is £12,570, the basic rate is 20% and the higher rate is 40% (gov.uk Income Tax rates). On top of income tax, Class 4 National Insurance applies at 6% on profits between £12,570 and £50,270, and 2% above that (gov.uk self-employed National Insurance rates). You can estimate the bill with our self-employed tax calculator.
If you trade through a limited company, the company pays Corporation Tax on its profits: 19% on profits up to £50,000 and 25% on profits over £250,000, with marginal relief easing the rate in between (gov.uk Corporation Tax rates). You then pay personal tax on whatever you take out as salary or dividends. The structure that leaves you with the most after tax depends on your profit level and how you draw income, which is exactly the kind of decision worth modelling rather than guessing.
The practical point is this: tax is the final layer of the margin. A business with a strong contribution margin but no plan for tax can still find itself short of cash at the filing deadline. Getting your numbers structured so margin, overheads and tax are all visible is the heart of good ecommerce finance, and it is what our ecommerce accounting service is built around. If your structure or drawings need a proper review, our tax advisory service is the place to start.
Frequently asked questions {#faqs}
What is a good profit margin for an ecommerce business in the UK?
There is no single right number, because it depends on your category, your model and your costs. As a rough guide, many sustainable ecommerce businesses aim for a contribution margin of 25% to 40% on net revenue and a net margin in the high single digits to mid teens after overheads and tax. The more useful question is not "is my margin good" but "does each sale contribute positive cash after all variable costs", which is your contribution margin.
What is the difference between gross margin and net margin?
Gross margin strips out only the cost of the product itself, so it tells you whether your pricing covers what you paid for the goods. Net margin strips out everything: cost of goods, platform and payment fees, shipping, returns, fixed overheads and tax. Net margin is what is genuinely left as profit. Between the two sits contribution margin, which removes all the per-order variable costs but not fixed overheads.
How do I calculate contribution margin per sale?
Take your selling price and subtract every cost that varies with that sale: the cost of goods, the platform or marketplace fee, the payment processing fee, shipping and packaging, the VAT you owe on the sale if you are registered, and a provision for returns. What is left is your contribution per unit. Divide it by the selling price to get your contribution margin percentage.
Does VAT come out of my margin?
Yes, if you are VAT registered. On a standard-rated sale to a UK consumer, the VAT is one sixth of the VAT-inclusive price (so £5 on a £30 sale), and it belongs to HMRC, not you. It must come out before you calculate profit. You must register once your VAT taxable turnover passes £90,000, the threshold in force since 1 April 2024.
How do returns affect my real profit margin?
More than most sellers expect. A return reverses the whole contribution of that sale, not just the product cost, because you usually still bear the outbound shipping, often the return shipping, and the fees already paid. A 10% return rate can reduce profit by considerably more than 10%. Building a returns provision into your per-unit margin is the only way to see your true number.
Know your real margin, then your real tax
If your dashboard says one thing and your bank balance says another, the fix is almost always better margin visibility: contribution margin per product, true net after fees and VAT, and a clear view of the tax sitting on top. Get those three right and pricing, discounting and ad spend stop being guesswork.
That is what we do for online sellers every day. Book a call with a Zmartly accountant through our ecommerce accounting service and we will help you find your true profit per sale, and make sure you are not paying more tax than you need to.
