As a creator, whether you’re an artist, author, musician, or content creator, receiving royalties can be a significant part of your income. While earning royalties is exciting, it’s essential to understand how this income is taxed to avoid surprises down the road. In this guide, we’ll explain what royalties are, how they’re taxed in the UK, and what you need to know as a creator.

What Are Royalties?

Royalties are payments made to the creator or owner of intellectual property (IP) in exchange for the use of that IP by others. These payments can come from:

• Book sales for authors
• Music streaming and song performances for musicians
• Film or television show reruns for actors and directors
• Licensing of images, artwork, or trademarks
• Digital content creators on platforms like YouTube and TikTok

Royalties are a form of passive income, but even passive income is subject to taxes.

Do You Need to Pay Tax on Royalties?

Yes, royalties are considered taxable income in the UK, and the way they are taxed depends on whether you’re self-employed or employed, and how you structure your royalty income.

Royalties for Self-Employed Creators

If you’re a self-employed creator, royalties will be part of your overall business income. This means that royalties you earn will be taxed along with your other income as part of your Self Assessment tax return. You’ll be required to:

1. Report your royalties as business income on your Self Assessment.
2. Pay income tax and National Insurance Contributions (NICs) based on your total income.

For the 2023/24 tax year, here are the tax bands:

• Personal allowance: Up to £12,570 (tax-free)
• Basic rate (20%): £12,571 to £50,270
• Higher rate (40%): £50,271 to £125,140
• Additional rate (45%): Over £125,140

In addition to income tax, you’ll need to pay NICs:

• Class 2 NICs: £3.45 per week if your profits exceed £12,570
• Class 4 NICs: 10.25% on profits between £12,570 and £50,270, and 3.25% on profits over £50,270

Royalties for Employees or PAYE Creators

If you are employed and receiving royalties, either through your employer or a separate venture, royalties may be taxed at the source via Pay As You Earn (PAYE). In this case, the organisation paying the royalties may withhold tax and send it to HMRC on your behalf. However, it’s crucial to keep track of the royalties you earn, as you may need to include them on your Self Assessment tax return.

How to Report Royalties on Your Tax Return

If you’re receiving royalties, you’ll need to file a Self Assessment tax return, regardless of whether you’re employed or self-employed. Here’s how to report your royalties:

1. Register for Self Assessment: If you’re self-employed or receiving additional income outside your employment, you must register with HMRC for Self Assessment.
2. Declare your royalty income: In your tax return, report the total royalty income you received during the tax year.
3. Claim expenses: As a creator, you may have allowable business expenses (such as marketing costs, software subscriptions, or studio equipment) that can reduce your taxable profits.
4. Submit your tax return: The deadline for filing online is usually 31 January following the end of the tax year.

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Claiming Expenses to Offset Royalty Income

One of the advantages of being a creator is that you can claim business-related expenses to offset your royalty income and reduce your tax bill. Some common expenses you may be able to claim include:

• Marketing and promotion: Costs associated with promoting your content or product.
• Equipment: Cameras, microphones, computers, and other tools needed to create content.
• Travel expenses: Costs of travel to gigs, book signings, or business meetings.
• Home office expenses: If you work from home, you may be able to claim a portion of your household bills.

For example, if you’re a YouTuber, you can claim expenses related to video production, such as editing software or filming equipment. Keep accurate records of these expenses, as HMRC may ask for proof.

VAT on Royalties

If your annual turnover exceeds £85,000, you must register for Value Added Tax (VAT). This means that, in addition to income tax, your royalty income may be subject to VAT.

For creators, this often applies if you’re earning significant income from multiple revenue streams, including royalties. If you’re VAT-registered, you’ll need to charge 20% VAT on royalty payments, file VAT returns, and submit payments to HMRC.

Double Taxation and International Royalties

If you earn royalties from abroad, you might be subject to double taxation, where you pay tax in both the UK and the country where the royalties were earned. The UK has double tax treaties with many countries, which means you can often avoid paying tax twice on the same income.

To avoid double taxation:

• Check for a tax treaty: If you’re earning royalties from another country, check whether the UK has a tax treaty with that country.
• Claim foreign tax credit relief: If you’ve paid tax on royalties in another country, you may be able to claim a foreign tax credit to reduce your UK tax liability.

It’s essential to keep track of the royalties you earn from different countries and report them on your tax return.

How CANGAF Accountants Can Help Creators with Royalty Income

Navigating the complexities of taxing royalty income can be challenging, especially if you’re earning royalties from multiple sources or across borders. CANGAF Accountants specialise in working with creators, artists, and freelancers, ensuring that you meet your tax obligations while maximising your tax efficiency.

We offer a range of services tailored to the needs of creators, including:

• Self Assessment tax returns for creators
• VAT registration and returns
• Advice on allowable expenses
• Guidance on international tax treaties and avoiding double taxation
• Year-round tax planning to ensure you’re not paying more tax than necessary

Contact CANGAF Accountants

• Address: 235 Tonge Moor Road, Bolton BL2 2HR
• Email: info@cangafltd.com
• Phone: 01204 859315
• Website: www.cangafltd.com

Get in touch with us to discuss your royalty income and how we can help streamline your taxes.

Conclusion

As a creator, royalty income can significantly contribute to your earnings, but it’s essential to understand how it’s taxed to avoid unexpected tax bills. Whether you’re earning royalties from book sales, music streaming, or digital content, you’ll need to report this income to HMRC and pay the appropriate taxes.

By keeping accurate records, claiming allowable expenses, and seeking professional advice from accountants like CANGAF, you can ensure that you stay compliant with HMRC while minimising your tax liability.