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Taxes on Affiliate Income Explained

Are you wondering whether you have to pay income tax on your affiliate marketing income? Then read on! In this guide, you’ll find out what tax you need to pay on affiliate income and tax-free exemptions that exist. This will help you to keep everything you earn and the circumstances under which you need to let HMRC about your side income.

Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.

1. Do You Need to Let HMRC Know About Your Affiliate Marketing Income?

You need to let HMRC know about your affiliate income when your income (the money you get paid) goes over £1,000 during one tax year. Below £1,000, you can choose to take advantage of the trading income allowance. This is where UK individuals can earn up to this amount without letting HMRC know. It’s important to note that £1,000 relates to income, not profit and that it isn’t always tax-efficient to use. Therefore, you should check whether using the trading allowance is right for you or if you should register with HMRC regardless of your turnover.

2. How to Let HMRC Know About Your Affiliate Income

Once your affiliate marketing income crosses the £1,000 income threshold during a tax year, it’s time to register with HMRC. This means registering as self-employed. You can do this online yourself by filling in the form on the HMRC website. I’ve put together a guide to registering as self-employed where I show you the form you need to use. Plus it has the 5 steps you need to take to complete your registration.

There are other business structures available, such as a Limited Company. And you may need to consider these depending on your intentions with your business and whether you have business partners. If you do decide you want to form a Limited Company, then you’ll need to do that straight away. Ideally, this should have been done before you started receiving affiliate income. This is so you’ll need to send out invoices and open a business bank account in the name of your LTD which you can only do legally once it is registered.

3. What Happens Once You Are Registered with HMRC

Once you have successfully registered as self-employed, you’ll receive a UTR number to make things official and you’ll need to follow the rules of self-assessment. This includes keeping business records, working out your own taxes and filling in a tax return (also referred to by HMRC as an SA100 form) online by 31 January each year. It’ll help to update your diary with all the tax year dates so you can stay on top of your deadlines. This process of reporting and paying tax is what is known as self-assessment.

4. Paying Taxes On Your UK Affiliate Marketing Income

When you have registered your affiliate marketing business with HMRC, you’ll need to pay the following self-employment taxes on your taxable business profits:

  • Income tax
  • Class 2 National Insurance
  • Class 4 National Insurance

The amount of each of these depends on how much profit your business makes, business expenses you can claim and the income tax allowances & reliefs you are entitled to.

If you are employed, then the amount of income tax you pay will be based on your combined income from your affiliate marketing and employed job. I’ve written a separate guide about tax when you’re employed and self-employed, where I go into more detail about how tax works when you have more than one source of taxable income and what you need to look out for on your payslip.

5. VAT on Affiliate Marketing Income

VAT is a tax charged on most goods and services supplied in the UK. It stands for Value Added Tax and the current standard rate is 20%.

If your affiliate marketing business’ taxable turnover exceeds £85,000, then you are legally required by HMRC to register for VAT. If that applies to you then once you go VAT registered you must:

  • Charge VAT at the correct rate on everything you sell;
  • Deduct VAT you paid to your suppliers from the VAT you charged your customers;
  • Pay the difference on VAT paid and received to HMRC, normally quarterly;
  • Submit VAT returns following the rules of making tax digital;
  • Keep VAT receipts.

Being registered for VAT carries more administration and reporting to HMRC. That said, some businesses choose to voluntarily register for VAT because it brings tax and cash flow benefits, especially when combined with certain VAT schemes.