Etsy Accounting UK: A Seller's Guide for 2025/26

You sell on Etsy. The money lands in your bank account already net of fees, the sales come in three currencies, and HMRC wants you to report something you can't quite see on your bank statement. That gap is where most Etsy bookkeeping goes wrong.

This guide shows you how to keep your Etsy books properly for the 2025/26 tax year: what to record, how VAT works, how to reconcile payouts, and which tax return you file. It's written for UK sole traders and small limited companies selling handmade, vintage or craft-supply products.

We'll use figures from official HMRC guidance throughout, and flag any worked numbers clearly as illustrative. If you'd rather hand the whole thing over, we do that too.

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Do I need to do Etsy accounting at all?

If selling on Etsy is a hobby and you make very little, you may not need to do anything. There's a trading allowance of £1,000 of gross trading income per tax year. If your total trading income is at or below that, it's tax-free and you generally don't need to tell HMRC or file a return (gov.uk: tax-free allowances on property and trading income).

Once you go over £1,000 of gross income, you're trading, and proper records become a legal requirement, not a nice-to-have.

The reason Etsy is trickier than a high-street shop comes down to how it pays you:

• Etsy collects the full amount the customer paid (your gross sale).
• It deducts its fees: listing, transaction, payment processing and, where it applies, Offsite Ads.
• It pays the net amount into your bank.

HMRC wants your gross sales as income and the fees as expenses. Your bank only ever shows the net figure. Get those two confused and your turnover, your profit and your VAT position all come out wrong.

If you sell internationally, hold stock outside the UK, or you're near the VAT threshold, the admin grows quickly. That's the point where most sellers either move to proper software or bring in an accountant. Our ecommerce accounting service and our Etsy seller page explain how we handle this for shops at every stage.

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How do I record sales revenue from Etsy?

Record the gross sale, not the payout. This is the single most important habit in Etsy bookkeeping.

Track gross sales, fees and net payout separately

Take a simple sale.

Illustrative example. A UK customer pays £100 for an item (you're not VAT registered, so there's no VAT in that figure). Etsy charges a 6.5% transaction fee of £6.50 and a payment processing fee of 4% plus £0.20, which is £4.20. The net payout to your bank is £89.30.

You record three things, not one:

• Income: £100 gross sale
• Expense: £10.70 Etsy fees
• Bank: £89.30 received

For tax, your income figure is the £100, never the £89.30. Etsy publishes its current fee rates on its seller fees page; always check the live rates, as Etsy changes them from time to time.

Convert foreign-currency sales to GBP

Etsy lets customers pay in their local currency, but HMRC reporting is in pounds. Convert every non-GBP sale to GBP using either the exchange rate on the transaction date or HMRC's published monthly rates (gov.uk: HMRC exchange rates). Pick one method and stick to it.

Currency conversion fees are an allowable expense. If you hold foreign currency before converting it and the rate moves, the resulting gain or loss also belongs in your figures.

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What are the VAT rules for Etsy sellers?

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VAT is the area sellers most often get wrong, so take it step by step.

When do I have to register for VAT?

You must register for VAT once your taxable turnover goes over £90,000 in any rolling 12-month period, the threshold in force from 1 April 2024 (gov.uk: VAT registration thresholds). The deregistration threshold is £88,000.

You can also register voluntarily below £90,000. That lets you reclaim VAT on materials, packaging and Etsy fees, but it also means charging VAT on your sales, so it's a judgement call rather than an automatic win.

If your business isn't based in the UK but you sell to UK customers, different rules apply and there's effectively no threshold.

What rate of VAT do I charge?

If you're VAT registered and your goods are in the UK at the point of sale, you charge the standard rate of 20% on sales to UK customers (gov.uk: VAT rates). Being handmade or vintage doesn't change that; there's no special reduced rate for craft items.

Where goods are outside the UK at the point of sale and the consignment is valued at £135 or less, the seller generally charges UK VAT at the point of sale rather than at the border (gov.uk: VAT and overseas goods sold directly to customers in the UK). Over £135, import VAT and duty are usually handled at the border. These low-value import rules are under review, so check the current position before you rely on them.

How does VAT work on exports and EU sales?

Exports of goods to customers outside the UK are usually zero-rated, but you must keep evidence the goods left the country. For some EU sales Etsy may collect VAT on your behalf under schemes such as the Import One Stop Shop; you still need that VAT reflected correctly in your records.

If VAT registered, you file VAT returns digitally under Making Tax Digital. MTD for VAT is mandatory for all VAT-registered businesses, with records kept digitally and returns filed through compatible software (gov.uk: Making Tax Digital for VAT). We cover the practical side on our VAT and tax advisory page.

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Which expenses can I claim as an Etsy seller?

Allowable expenses reduce your taxable profit, so capturing them all matters. As an Etsy seller you can typically claim:

• Etsy fees - listing, transaction, payment processing and Offsite Ads
• Cost of goods sold - materials, components and packaging used on items sold
• Postage and shipping to your customers
• Marketing - external advertising you pay for directly
• Software you use to run the business
• Professional fees such as accountancy
• Equipment and tools used to make or photograph products
• Use of home if you work from home

For working from home, the simplest approach is HMRC's flat-rate simplified expenses rather than apportioning every bill (gov.uk: simplified expenses if you're self-employed). The alternative is to claim a fair proportion of your actual household costs based on rooms and hours used, which needs better records.

Watch the line between business and personal. Materials you buy and then keep for personal use aren't deductible, and finished stock you take for yourself is recorded as drawings, not an expense.

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What is COGS and how do I calculate it?

Cost of goods sold (COGS) is the direct cost of the products you actually sold in the period. It's the figure that turns "sales" into "gross profit".

The COGS formula

The standard calculation is:

Opening inventory + Purchases - Closing inventory = COGS

Illustrative example. A candle maker starts the year with £800 of materials, buys £4,200 of wax, wicks and jars during the year, and finishes with £600 of unused stock.

COGS = £800 + £4,200 - £600 = £4,400.

If sales for the year were £15,000, gross profit is £15,000 - £4,400 = £10,600, a gross margin of about 70.7%.

What goes in, and what stays out

Getting this split right keeps your gross profit meaningful and avoids the kind of inconsistency that draws HMRC questions.

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How do I reconcile Etsy payouts for tax?

Reconciliation is the process of matching what Etsy reports, what you record, and what hits your bank. Because Etsy nets fees off before paying you, skipping it understates both your income and your expenses.

Here's the flow for a single sale.

Illustrative example. A customer pays £100. Etsy deducts a 6.5% transaction fee (£6.50), a payment processing fee of 4% plus £0.20 (£4.20) and, on this sale, a 12% Offsite Ads fee (£12.00). Total fees are £22.70, so the net payout is £77.30.

To reconcile a period:

1. Download Etsy's payment account statement from Shop Manager.
2. Pull out total gross sales, total fees by type, and the net payout.
3. Record gross sales as income and each fee category as an expense in your books.
4. Check the net payout matches your bank deposit.

Do this monthly. Catching a mismatch in March is easy; untangling twelve months of it the night before your return is not. MTD-compatible bookkeeping software can import Etsy data and post these summaries automatically, which is worth it once your volume climbs.

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What tax do I pay on Etsy sales?

Etsy income is taxable. What you pay depends on whether you trade as a sole trader or through a limited company.

Sole trader (Self Assessment)

As a sole trader you report your net profit (income minus allowable expenses and COGS) on a Self Assessment return. For 2025/26:

These rates and thresholds are from gov.uk: income tax rates, and the Personal Allowance is confirmed on gov.uk: income tax rates and allowances. The Personal Allowance reduces by £1 for every £2 of income over £100,000.

On top of income tax, self-employed sellers pay Class 4 National Insurance on profits: 6% on profits between £12,570 and £50,270, and 2% above £50,270 for 2025/26 (gov.uk: self-employed National Insurance rates). Class 2 is no longer charged as a flat weekly amount, though your NI record is still treated as maintained where profits are at or above the Small Profits Threshold.

Illustrative example. A jewellery maker trading as a sole trader has £48,000 of gross Etsy sales and, after COGS of £18,500, Etsy fees of £6,960 and other allowable expenses of £7,630, a net profit of £14,910.

• Income tax: (£14,910 - £12,570) = £2,340 taxed at 20% = £468
• Class 4 NIC: £2,340 at 6% = £140.40
• Total: about £608

That's why tracking every allowable expense pays off: each pound of genuine business cost you capture reduces the profit you're taxed on. You can sanity-check your own numbers with our self-employed tax calculator.

The Self Assessment filing and payment deadline is midnight on 31 January following the tax year (gov.uk: Self Assessment deadlines). You may also have payments on account due on 31 January and 31 July.

Limited company (Corporation Tax)

If you trade through a company, the company pays Corporation Tax on its profits. For Financial Year 2025 the small profits rate is 19% on profits up to £50,000 and the main rate is 25% on profits over £250,000, with marginal relief in between (gov.uk: Corporation Tax rates). Corporation Tax is due 9 months and 1 day after the company's year end, and the CT600 return is filed within 12 months of the year end.

You then take money out as salary and dividends, each taxed separately. Whether a company beats sole-trader status depends on your profit level and how you draw funds, which is exactly the kind of question our corporation tax service is built to answer.

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What records and software do I need?

You must keep your business records for at least the time HMRC requires, and the period differs by tax. As a sole trader, you keep your Self Assessment records for at least five years after the 31 January submission deadline of the relevant tax year (gov.uk: self-employed records). If you're VAT registered, you keep your VAT records for six years (gov.uk: keeping VAT records).

What to retain:

• Etsy payment account statements and sales reports
• Receipts and invoices for materials, equipment and other purchases
• Business bank statements
• VAT invoices, if you're registered

A dedicated business bank account makes all of this far simpler and keeps personal spending out of your books.

On software, you have a spectrum. A spreadsheet can work if you're a low-volume, UK-only, non-VAT-registered seller with the patience for manual entry. Once you're VAT registered you'll need MTD-compatible bookkeeping software, and once your order volume grows, an integration that pulls Etsy data in automatically saves hours and cuts errors. We're software-agnostic and will help you pick what fits your shop rather than push a particular brand.

Looking ahead, Making Tax Digital for Income Tax begins on 6 April 2026 for sole traders and landlords with qualifying income over £50,000, based on 2024/25, then extends to those over £30,000 from April 2027 (gov.uk: check when to sign up for MTD for Income Tax). If your Etsy profits are heading that way, it's worth getting digital records in place now.

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Common HMRC pitfalls for Etsy sellers

A handful of mistakes come up again and again. In practice these are the ones we most often see and fix.

• Recording the payout instead of the gross sale. This understates turnover and can hide a VAT registration that's already due.
• Mixing COGS and overheads. Etsy fees, customer postage and advertising are expenses, not COGS. Keep the split clean.
• Assuming handmade means lower VAT. It doesn't; handmade and vintage goods are standard-rated when you're VAT registered.
• Ignoring foreign-currency movements. Conversion fees and exchange gains or losses belong in your figures.
• Drifting over the VAT threshold unnoticed. Track rolling 12-month turnover every month so £90,000 never sneaks up on you.
• Over-claiming use of home. Use HMRC's flat rate unless you genuinely have a large, dedicated workspace and the records to back an actual-cost claim.
• Binning records too early. Keep Self Assessment records for at least five years after the 31 January deadline, and VAT records for six years.

Key takeaways

• Always record the gross sale and the fees separately; never just the payout.
• Convert foreign sales to GBP and keep the method consistent.
• The VAT registration threshold is £90,000 (2025/26); voluntary registration is optional below it.
• Sole traders pay income tax plus 6% Class 4 NIC on profits in the basic band for 2025/26.
• Reconcile monthly and keep your records (five years for Self Assessment, six for VAT).

Talk to Zmartly about your Etsy shop

Etsy accounting eats into the time you'd rather spend making and selling. We set up your bookkeeping, sort your VAT and file your return so the numbers are right and you're not the one chasing them.

Book a free 20-minute call with a Zmartly accountant through our ecommerce accounting page, and we'll tell you exactly what your shop needs.