Lots of news outlets are doing the press-release gurgle today, about Amazon introducing 70% royalties for UK authors.
70% royalties for UK authors sounds great, but let’s work out what you actually get. According to my calculations below, 70% actually ends up as 22.5%.
Let’s say you set a price of £4.99 for a Kindle novel. Amazon will automatically add VAT (the UK sales tax) at 15% to the Store price. So the actual price your customer will see is £5.74. You don’t get any of that difference, and the 15% goes straight to the tax man at the Inland Revenue.
So your base figure on which royalties is calculated is £4.99. Let’s be stingy and say your ebook is a chunky one at 500kb in size. That means it could potentially incur a 0.10 pence per megabyte delivery charge over 3G Kindles. Let’s say that happens in one sale out of every two. So, to be on the safe side we have to knock an average of 0.05 pence off your profit. So we’re down to £4.94.
From this Amazon theoretically gives you 70% royalties on £4.94. However, the U.S. government will step in, even though you’re a UK citizen and pay taxes here in the UK. They’ll automatically grab a 30% “withholding tax” from royalties on Kindle sales by non-US resident publishers. So your royalties will actually come down to 40%, or £1.97 profit on a book that sells for £5.74.
The charges don’t end there. Those in the UK can only be paid by cheque, made out in dollars, and your bank will have a hefty cover charge to pay for “processing” a cheque that’s made out in dollars. Currently HSBC charge £6 for cheques up to $100, and £12 for over $100. The Co-op Bank is apparently cheaper at £4/£12. So, on the basis that you’d need to sell 32 x £5.74 books to trigger the $100 minimum cheque payout from Amazon, and that the bank will charge £12 to process the $ cheque, this equals a further “bank tax” of 0.37 pence lost per book.
So you’re now left with £1.60 profit per book. And there’s still the UK tax man to consider. The Inland revenue will want you to pay basic-rate income tax of 20% on your profits (another 0.32 pence lost per book). That leaves you with a final profit of £1.28 on a book that sells for £5.74. You may also want to factor in a small amount for the fraction of broadband / electricity / personal time you’re using to maintain the Amazon DTP account. If you sell five books a week, you might be earning final real-world after-tax profits of £333 per year. Enough to pay for a brand new Kindle every year, and all the ebooks you’re likely to want to read on it, but you’re unlikely to get rich that way.
So your real final royalties on the sale price are 22.5% [actually 26%: see correction below], having lost around 76% of the sale price to government taxes and usurious bank charges. Welcome to the world of Big Government.
It’s been pointed out that the math was a little wrong. The US tax system takes 30% of the 70%, or 21% of the total price. So they take £1.21. And don’t forget that VAT will be 20% soon. It also seems that there’s a download charge for all sales in the USA (not the case in the UK), even if you only have a wi-fi Kindle. So let’s do the calculations again:
You set the price: £4.99. 20% VAT increases it to £5.98.
Minus hypothetical 0.05 pence deliver fee = £4.94
70% royalties on £4.94 = £3.46
Minus £1.21 US Tax = £2.25
Minus 0.37 per book $-to-£ bank charges = £1.88
Minus UK income tax = £1.56 (final profit)
£1.56 = 31.5% of the Amazon DTP price you set. 26% of the actual selling price.