A Guide to Paying Tax on Affiliate Income

Intro

Affiliate marketing is a useful way of earning a little supplemental income or building a personal brand online. Affiliates can range from successful bloggers who put affiliate links in their content to earn some extra money part-time to video content producers and influencers who are paid handsomely for their endorsement of a product or service that a business may offer.

This method of marketing has seen growth over the years, adding a new dimension of income for online influencers and offering brands the ability to gain more exposure. Affiliates aren’t just for fashion blogs and luxury brands either. Several industries are now making use of affiliates in order to expose their products to new audiences and get the benefits of being associated with an online person that consumers trust.

This guide will provide the blueprint for a better understanding of what affiliate marketing is defined as, whether affiliates are required to register and pay taxes for their earnings, and how to avoid the stiff penalties that can come with failing to adhere to the rules and regulations that apply to affiliates and their taxation responsibilities.

What is Affiliate Income?

For a business, the trust and respect that an affiliate within the same industry has accrued can be an effective way of selling a product or service. A customer will associate that product or business with the affiliate, and by proxy, the brand the affiliate endorses or links any content to will potentially gain that same trust to a whole new audience of consumers.

In exchange for this, a business will pay the affiliate a commission for promoting them. This provides an income for the affiliate, which can range in price depending on the reach and popularity of the publisher in question.

So, what is affiliate income? Think of it as a commission that an affiliate gets in exchange for a specified amount of conversions that come from the links they put in their blogs or the endorsements they make in video content for certain products.

Examples of Affiliate Income

Anyone who has ever seen the words “sponsored post” or “affiliate link” when browsing a website will have already encountered affiliate marketing in some way or another. Below is a standard example of how the affiliate income process works in 5 simple steps.

(Affiliate links comparing accounting software providers)

• Step 1: An affiliate publicly endorses or shows an advert for a business with a link via a blog, YouTube video, social media, or website.
• Step 2: A user then clicks on the unique affiliate link provided and explores what the merchant offers.
• Step 3: The user then purchases a product or service from the merchant in question.
• Step 4: The purchase transaction or lead is noted, recorded, and confirmed by the merchant
• Step 5: As the conversion was generated from the affiliate link, the affiliate is paid a monetary commission for the purchase from the merchant (often via an affiliate network)

Each commission rate will vary depending on the company and affiliate. They can range from as low as 1% of a sale to upwards of 50% in some rare cases. Some affiliate agreements even provide an agreed-upon flat rate for each sale instead.

Earning Affiliate Income and Paying Taxes

Regardless of whether an individual pursues affiliate marketing as a full-time venture or as a side gig to earn some additional income, the earnings gained from being an affiliate are susceptible to the same tax and income laws that any other form of income would be.

For UK-based affiliates, this means ensuring that all income is correctly noted and submitted to the relevant parties to avoid any potential penalties and fines later on down the road.

If you're a freelancer earning affiliate income, make sure to use the freelancers tax calculator on Afirmo to get an accurate estimate of your self-employment tax liability as part of your guide to paying tax on affiliate income.

Should I Let HMRC know about any Affiliate Income?

People are legally required to make HMRC aware of the money they are paid if that income is over the amount of £1,000 (over the course of a tax year). For affiliate income, this means that if any earnings surpass that limit of £1,000 then they’ll need to be officially divulged to HM Revenue & Customs.

Any affiliate income within a tax year that is under the amount of £1,000 may fall under the terms of trading income allowance. By taking advantage of this income allowance, individuals are permitted to earn up to £1,000 without having to let HMRC know. However, it’s crucial to understand that this amount is in relation to an affiliate’s income, and not necessarily their profit.

To avoid any issues or oversights, it’s best to register with HMRC regardless of the amount earned within the tax year. This helps to prevent problems when turnover increases and ensures that UK-based affiliates avoid large registration penalty fees in the future.

Registering Affiliate Income with HMRC

In order to correctly register affiliate income with HMRC, an affiliate will need to register themselves as either self-employed or as a Limited company. For self-employment, registering can be done by completing a form on the HM Revenue & Customs website.

(Registration process for HMRC)

To ensure a faster and more efficient process, it’s a good idea to have the following information close by.

• Full name
• Date of birth
• National Insurance number
• Registered UK address
• Phone number and email address
• Passport and driving licence
• Paylisps and P60s
• The start date of the affiliate business

For individuals who choose to register as self-employed, regardless of profit, it’s advised that affiliate businesses do so by the 5th of October from the end of the first tax year as a business. In other words, a business that begins in January 2023 is obligated to let HMRC know by the 5th of October 2023.

If a deadline has been missed, it’s essential to register as soon as possible to avoid the potential risk of incurring any late penalties.

For affiliates looking to register as a Limited Company, the steps taken to register with Companies House should have been completed before any affiliate income is received. Once incorporated, HMRC will be notified of the setup. After this, a Limited Company should receive a letter from HMRC that contains the following information:

• Confirmation of the Limited Company
• The tax rules and requirements to adhere to
• The Unique Taxpayer Reference (UTR) to be used for tax matters

Paying Taxes on Affiliate Income

Once affiliate income surpasses the £1,000 threshold mentioned above, there’s the potential to earn up to £12, 570 within a tax year without having to pay any taxes. This is known as a tax-free personal allowance. Bear in mind that this does not exclude an affiliate’s responsibility to register with HMRC and disclose earnings.

Below is a breakdown of the UK bands for earnings and taxable income.

• A 0% tax rate on incomes up to £12,570 (personal allowance)
• A 20% tax rate on incomes between £12,571 and £50,270 (basic rate)
• A 40% tax rate on incomes between £50,271 and £150,000 (higher rate)
• A 45% tax rate on incomes above £150,000 (additional rate)

Individuals who earn affiliate income as part of a side-gig and remain in full-time employment are advised to be aware that income tax will be determined on the basis of combined earnings. Therefore, when calculating taxable income, it’s important to include all earnings over the course of the tax year.

Affiliates registering with HMRC as self-employed will also be subject to National Insurance payments on any business profits over the personal allowance thresholds noted above. For affiliates in self-employment, National Insurance rates will fall under either Class 2 or Class 4.

For the 2022/2023 tax year, the National Insurance rates are as follows:

Class 2 National Insurance - £3.15 per week on profits over £6,725 per year

Class 4 National Insurance - 9.73% on profits between £11,908 and £50,270 and 2.72% on any profits above that amount.

Affiliate Income and Accurate Accounting

(An accounting software dashboard)

A crucial part of sustaining a small business (or a career being self-employed) is maintaining accurate accounting records. Therefore, keeping track of accounting matters and upcoming dates for due payments is a fundamental part of any tax-abiding individual or company owner. Thus, to help self-employed individuals (and also small business owners) with this endeavour the government introduced the Making Tax Digital initiative which obligated businesses to keep digitalised records as well to submit regular updates to HMRC. The idea is to facilitate a faster, more streamlined taxation process. In order to take advantage of these systems and report any business earnings to HMRC in a more simplified way, businesses are required to have MTD (Making Tax Digital) compliant software. From April 2024 this system will apply to anyone registered for self-assessment, which is where most UK affiliates are likely to be positioned.

Allowable Expenses for Affiliates

Self-employed individuals are permitted to make certain deductions from the costs of running a business. These are commonly known as allowable expenses. For instance, if an affiliate has an annual income of £35,000 but claims back £5,000 in allowable expenses, the tax will only be paid on the remaining amount of £30,000 (the taxable profit).

Below are some of the standard expenses that self-employed individuals in the affiliate industry may not have to pay taxes on.

• Office costs like branded stationery or phone bills
• Travel expenses (petrol, train fares, parking, etc)
• Financial costs such as bank charges or insurance
• Website audit and maintenance costs
• Business advertising and marketing costs
• Training courses related to the business

Affiliates working from home may still be able to claim some costs back for the following outgoings:

• Council Tax
• Heating and electricity bills
• Internet and phone bills
• Rent and mortgage interest

However, in order to do this, affiliates working from home will be required to divide up these costs using a fair method of calculation.

For example, an affiliate working from home in a 6-bedroom home may only use 1 room as an office. If an annual electricity bill is £900, affiliates can claim back £150 of that bill as an allowable expense (£900 divided by 6 equals £150).

For affiliates registered as a Limited Company, the rules are slightly different. Business costs can be deducted from annual profits before tax, and anything used personally as a company benefit must be reported to HMRC accordingly.

Submitting your Tax Return as an Affiliate

In the UK, the tax year begins on April 6th of any given year and ends on April 5th of the following year. The digitisation of taxation matters has facilitated a more simplified tax return that can be done by using HMRC’s online tax return portals. Ensuring all self-assessments are submitted on time prevents any potential fines and issues later on in the year for an affiliate business.

All a fully-registered affiliate should need in order to submit a tax return is the user ID and password provided by HMRC on the day of the business being registered.

For Limited Companies, affiliates will be required to file any accounts with Companies House, in addition to the tax returns that must be filed with HMRC. For some private Limited Companies, it’s possible to file both of these together, depending on whether an auditor is needed.

In order to submit a tax return with HMRC separately from Companies House, the following HMRC information can be useful to ensure everything is accurate and accounted for. To quicken the process, it’s best to have any Companies House details and registration numbers nearby, as well as any HMRC account information.

Affiliate Income and Taxes: Simplified Processes for a Succesful Future

Regardless of how many hours go into an affiliate business, and whether its profits come from a part-time hobby or a full-time venture, keeping on track of earnings, due taxes, and the dates in which they must be paid is a vital part of maintaining a successful business.

As a fully-registered business owner, an affiliate must keep clear and concise records of all financial information, transactions, and expenses. In order to ensure that future taxes are submitted on time and accurately, the government has encouraged individuals to embrace the transition into a fully-digital tax platform for greater efficiency, transparency, and accuracy.

By staying vigilant and meticulous in what needs to be paid and when it needs to be done, affiliates can set the groundwork for a future that’s easier to manage, plan ahead for, and ultimately, more convenient for keeping their business adherent to UK taxation laws.

For further guidance and any other question, be sure to visit the HM Revenue & Customs website section dedicated to business and self-employed matters.