This page answers one question: if you dropship in the UK, what do you actually owe, and when? It is for sole traders and small limited companies selling physical goods, and every threshold, rate and deadline below was checked against the named gov.uk page on 15 September 2026. We build Orbit Commerce, an ecommerce platform, so we have a stake in you opening a shop, which is why every number here is sourced to gov.uk rather than to us. This is general information, not tax advice; check gov.uk or an accountant.
Start here: the decision tree
Work down this list in order.
- Is your gross trading income for the tax year (6 April to 5 April) over £1,000? If no, the trading allowance covers it and you need not register. If yes, go to 2. Gross means what customers paid you, not what you kept (gov.uk, checked 15 September 2026).
- Register for Self Assessment by 5 October following the end of that tax year, then file online and pay by 31 January. For 2026 to 2027: register by 5 October 2027, file and pay by 31 January 2028 (gov.uk, checked 15 September 2026). Go to 3.
- Where are the goods sitting when the customer clicks buy? In the UK, go to 4. Outside the UK, go to 5.
- UK-located goods. Ordinary domestic rules: register for VAT once taxable turnover over any rolling 12 months passes £90,000, or as soon as you expect to pass it in the next 30 days alone. Below that it is optional. Go to 6.
- Overseas goods sold direct to UK customers. If the consignment is worth £135 or less, UK VAT is due at the point of sale and you must be VAT registered to charge it, whatever your turnover. Above £135, import VAT and duty apply at the border and whoever receives the parcel gets the bill. Go to 6.
- Trading through a limited company? If yes, the company pays corporation tax at 19% up to £50,000 of profit and 25% above £250,000, Marginal Relief in between, and you pay personal tax on salary or dividends. If no, you pay income tax and Class 4 National Insurance on your profit. Go to 7.
- Keep the records: Self Assessment for at least 5 years after the 31 January deadline they relate to, VAT for 6 years.
Step 6 changes the rate, not the deadlines: we compare the structures in sole trader or limited company, and registering a business to sell online in the UK covers the steps for both. For the wider legal picture, our guide to dropshipping in the UK covers consumer law, delivery deadlines and refunds.
When do you have to tell HMRC anything at all?
Once your gross trading income passes £1,000 in a tax year. Below that the trading allowance covers you and there is nothing to register or report (gov.uk, checked 15 September 2026). Above it, Self Assessment registration is compulsory by 5 October following the end of that tax year, even if you made a loss.
The trap is that the £1,000 is income, not profit. Sell £2,400 of goods that cost you £1,900 and you have made £500, but your gross income is £2,400, so you must register. Most dropshippers cross £1,000 within weeks of their first ad. You also cannot claim the allowance and your expenses: it is the flat £1,000 or your actual costs, whichever is worth more.
Worked example 1: a side hustle under £1,000
Assumptions: you started in October and took 34 orders by 5 April averaging £24, so gross income of £816 with £310 of supplier costs.
Gross income of £816 against a £1,000 trading allowance: no registration, no income tax, no National Insurance. Nothing to file, nothing to pay. But note how close it is: eight more orders and you are into the registration rule. Keep a running total of gross sales from day one, because when you cross the line you need figures for the whole year, not from the date you noticed.
Worked example 2: a sole trader on £30,000 turnover
Assumptions: sole trader, no other income, 2026 to 2027 tax year, UK-based supplier, turnover of £30,000 so under the VAT threshold. Rates and bands from gov.uk, checked 15 September 2026.
| Line | Amount |
|---|---|
| Turnover (all customer payments, including delivery) | £30,000 |
| Goods bought to sell on | −£8,400 |
| Advertising and marketing | −£1,600 |
| Payment processing fees | −£668 |
| Ecommerce subscription | −£300 |
| Use of home, flat rate £26 a month | −£312 |
| Accountant, insurance, phone | −£720 |
| Profit | £18,000 |
Now the tax on that profit.
| Step | Working | Amount |
|---|---|---|
| Personal allowance | 2026 to 2027 standard allowance | £12,570 |
| Taxable profit | £18,000 − £12,570 | £5,430 |
| Income tax, basic rate | 20% of £5,430 | £1,086.00 |
| Class 4 National Insurance | 6% of £5,430 (band £12,570 to £50,270) | £325.80 |
| Class 2 National Insurance | Treated as paid above the small profits threshold (gov.uk, checked 15 September 2026) | £0.00 |
| Total due | £1,411.80 | |
| You keep | £18,000 − £1,411.80 | £16,588.20 |
Two things catch people out. Payments on account: because the bill is over £1,000, HMRC asks for half of it again up front against next year, so 31 January costs £1,411.80 plus £705.90, then another £705.90 on 31 July (gov.uk, checked 15 September 2026). Budget about one and a half times your first bill. And if you already have a job, it usually uses up your personal allowance, so the whole £18,000 is taxed at 20%: £3,600 plus the same £325.80 of Class 4, which is £2,514 more than the table for identical trading. Side hustlers should set aside nearer 22p in the pound, not 8p, and 26p on anything above £12,570 of profit once Class 4 kicks in.
When do you have to register for VAT, and when might you want to first?
You must register once taxable turnover over any rolling 12 months passes £90,000, or when you expect to pass it in the next 30 days alone (gov.uk, checked 15 September 2026). It is a rolling test, not your accounting year: at each month end, add the previous twelve and check. The separate £135 rule below can force registration at any turnover.
Registering early only pays when most of your customers are VAT-registered businesses who reclaim what you charge, so the 20% costs them nothing and you reclaim VAT on your own costs. For a consumer shop it means a 20% price rise or a 20% margin cut. Our guide to UK VAT for online sellers covers the rolling test and the flat-rate trap that catches dropshippers in particular.
What the £135 rule means for you as the seller of record
If the goods are outside the UK at the point of sale and the consignment is worth £135 or less, UK VAT is due at the point of sale rather than at the border, and the seller must register and charge it (gov.uk, checked 15 September 2026). That is you, not your supplier, unless an online marketplace facilitated the sale, in which case the marketplace accounts for the VAT instead. The £135 is the intrinsic value of the whole consignment, excluding transport and insurance shown separately. Three consequences:
- No turnover threshold. Ship your first £30 item from an overseas warehouse and you are inside the regime. The £90,000 figure is irrelevant to that sale.
- A big basket flips the treatment. A consignment over £135 reverts to import rules: VAT and duty at the border, billed to your customer before the courier hands the parcel over. Non-excise goods at £135 or less attract no customs duty (gov.uk, checked 15 September 2026).
- Business customers can take it off you. If a UK VAT-registered buyer gives you their VAT number you do not charge VAT: note “reverse charge: customer to account for VAT to HMRC” on the invoice and they account for it (gov.uk, checked 15 September 2026).
Worked example 3: a VAT-registered seller shipping £135-or-less consignments
Assumptions: goods sit in an overseas warehouse at the point of sale, each consignment is one item costing you £14, you are VAT registered because the rule above requires it, and you sell at £42.00 including VAT. The standard rate is 20%, so the VAT inside a gross price is a sixth of it (gov.uk, checked 15 September 2026).
| Line | Working | Amount |
|---|---|---|
| Sale price charged, VAT included | £42.00 | |
| VAT you owe on the sale | £42.00 ÷ 6 | −£7.00 |
| Your actual sale value | £35.00 | |
| Supplier cost, no UK VAT to reclaim | −£14.00 | |
| Card processing, 2% + 25p, VAT exempt | £0.84 + £0.25 | −£1.09 |
| Advertising, net of VAT reclaimed | £9.60 paid, £1.60 back | −£8.00 |
| Left before subscription and refunds | £11.91 |
On the VAT return that order shows output VAT of £7.00 and input VAT of £1.60, so £5.40 goes to HMRC. Check the cash: £42.00 in, less £14.00 supplier, less £1.09 card fees, less £9.60 ads, less £5.40 to HMRC, leaves £11.91.
Now the mistake. Price that item at £42.00 believing all of it is yours and you have not made £18.91, you have made £11.91 and you owe £7.00 you have already spent. Across 400 orders that is £2,800 of somebody else’s money in your current account. Move the VAT out the day it lands, and price by starting from the margin you need and adding VAT on top.
Note what you cannot reclaim: there is no import VAT on these consignments, so no input VAT on your cost of goods, the biggest line in the table, and payment processing is VAT exempt. Reclaimable VAT is mostly ads, software and professional fees.
What can you deduct as an allowable expense?
Anything wholly and exclusively for the business. gov.uk lists the categories (checked 15 September 2026); for a dropshipper:
- Things you buy to sell on: every payment to your supplier, including their shipping charge.
- Advertising and website costs: ad spend, your ecommerce subscription, domain and email.
- Office and staff costs: stationery, phone bills, the business share of broadband, salaries and freelancers.
- Financial costs: processing fees, business insurance, bank charges.
- Travel: fuel, parking and fares for business travel, including trips to see a supplier.
- Business premises, or the simplified home-working flat rate: £10 a month for 25 to 50 hours, £18 for 51 to 100, £26 for 101 or more (gov.uk, checked 15 September 2026). Phone and internet are claimed separately at actual business use.
- Training in your existing trade: refresher courses count, a course teaching a brand new trade generally does not.
Not allowable: refunds, which reduce turnover rather than counting as an expense; client entertaining; and your own drawings, which are profit already taxed. And none of it in a year you take the £1,000 trading allowance.
What records must you keep, and for how long?
Self Assessment records for at least 5 years after the 31 January deadline they relate to, VAT records for 6 years (gov.uk, checked 15 September 2026). So a 2026 to 2027 return filed by 31 January 2028 needs its records until at least January 2033, with VAT running to its own six-year clock.
What to keep: every sale with its date, value and VAT treatment; supplier invoices; processor statements showing gross sales, fees and payouts; refunds and chargebacks; ad invoices; bank statements. If you sell on marketplaces too, keep their settlement reports, because the money hitting your bank is net of their fees and HMRC cares about the gross. VAT-registered businesses must keep it digitally and file through compatible software under Making Tax Digital, and copying numbers between spreadsheets by hand breaks that rule.
Questions people ask about dropshipping tax in the UK
Do I pay tax on dropshipping in the UK?
Yes, on your profit, once gross trading income passes £1,000 in a tax year. Below that the trading allowance covers it. Above it you register for Self Assessment by 5 October following that tax year, then pay income tax and Class 4 National Insurance on profit after expenses (gov.uk, checked 15 September 2026).
Do I need to register for VAT to dropship in the UK?
In two cases. Either taxable turnover passes £90,000 over any rolling 12 months, or your goods are outside the UK at the point of sale in consignments worth £135 or less, which requires registration at any turnover. UK-warehoused stock below £90,000 needs no registration (gov.uk, checked 15 September 2026).
What is the £135 rule for dropshipping?
For goods outside the UK sold directly to a UK customer in a consignment worth £135 or less, UK VAT is due at the point of sale, not at the border, and the seller must register and charge it. Above £135, import VAT and duty are billed to your customer (gov.uk, checked 15 September 2026).
What expenses can a dropshipper claim?
Goods bought to sell on, advertising and website costs, processing fees, insurance, business use of phone and broadband, travel, staff and freelancers, relevant training, and either real premises costs or the simplified home-working rate of £10 to £26 a month. You cannot claim expenses in a year you take the £1,000 trading allowance.
How long do I need to keep dropshipping records?
Self Assessment records for at least 5 years after the 31 January deadline for that tax year, and VAT records for 6 years (gov.uk, checked 15 September 2026). Keep sales, supplier invoices, processor statements, refunds and ad invoices. VAT-registered businesses must keep them digitally under Making Tax Digital.
None of this gets easier if your sales data is scattered. Orbit keeps orders, fees and payouts in one place with CSV export of each, and stamps multi-currency orders with the base currency so year-end figures come out in pounds. We are not HMRC-recognised Making Tax Digital software and there is no direct accounting sync yet, so that export is what you or your accountant work from. To try it on your own numbers there is a 14-day free trial, no card required.