Value Added Tax (VAT) is a consumption tax charged on most goods and services sold in the UK. Whether you're running a business, preparing invoices, or simply wanting to understand your receipts, knowing how to calculate VAT is an essential skill. This comprehensive guide covers everything from basic calculations to VAT registration requirements.
Current UK VAT Rates in 2025
The UK operates three different VAT rates depending on the type of goods or services being sold:
| VAT Rate | Percentage | Applies To |
|---|---|---|
| Standard Rate | 20% | Most goods and services |
| Reduced Rate | 5% | Home energy, child car seats, sanitary products |
| Zero Rate | 0% | Most food, children's clothes, books, newspapers |
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How to Add VAT to a Price
When you have a net price (excluding VAT) and need to calculate the gross price (including VAT), use this simple formula:
Gross Price = Net Price × 1.20
For 20% VAT. Use 1.05 for 5% reduced rate.
Example: Adding VAT to £250
Net Price: £250.00
Calculation: £250 × 1.20 = £300.00
VAT Amount: £50.00
Gross Price (inc. VAT): £300.00
How to Remove VAT from a Price
When you have a VAT-inclusive price and need to find the net amount, you'll need to perform a reverse VAT calculation:
Net Price = Gross Price ÷ 1.20
VAT Amount = Gross Price - Net Price
Example: Removing VAT from £480
Gross Price (inc. VAT): £480.00
Net Calculation: £480 ÷ 1.20 = £400.00
VAT Amount: £480 - £400 = £80.00
Net Price (exc. VAT): £400.00
Quick VAT Calculation Shortcut
To find just the VAT amount from a gross price, you can use this shortcut:
VAT Amount = Gross Price ÷ 6
This works because 20% of the net is the same as 1/6 of the gross.
VAT Quick Reference Table
| Net Price | VAT (20%) | Gross Price |
|---|---|---|
| £50 | £10 | £60 |
| £100 | £20 | £120 |
| £250 | £50 | £300 |
| £500 | £100 | £600 |
| £1,000 | £200 | £1,200 |
| £5,000 | £1,000 | £6,000 |
| £10,000 | £2,000 | £12,000 |
VAT Registration Threshold 2025
As a business owner, you must register for VAT if your taxable turnover exceeds the registration threshold:
From April 2024, you must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period, or if you expect it to exceed this threshold in the next 30 days.
When Must You Register?
- Mandatory registration: Your turnover exceeds £90,000 in the last 12 months
- Future test: You expect turnover to exceed £90,000 in the next 30 days alone
- Voluntary registration: You can register voluntarily below the threshold to reclaim VAT on purchases
VAT Schemes for Small Businesses
The UK offers several simplified VAT schemes that can reduce admin and potentially save money:
1. Flat Rate Scheme
Pay a fixed percentage of gross turnover (varies by industry, typically 7-14.5%). Simpler accounting as you don't track VAT on individual purchases.
2. Cash Accounting Scheme
Pay VAT when you receive payment from customers, rather than when you issue invoices. Helpful for cash flow if you have slow-paying customers.
3. Annual Accounting Scheme
Submit one VAT return per year instead of quarterly. Make advance payments throughout the year based on estimated liability.
Common VAT Questions
What items are VAT exempt?
Some goods and services are exempt from VAT entirely, including:
- Insurance
- Postal services (Royal Mail)
- Education and training
- Health services by registered practitioners
- Burial and cremation services
What's zero-rated vs exempt?
Zero-rated items have 0% VAT but still count toward your taxable turnover. Exempt items don't count toward the threshold and you can't reclaim VAT on related purchases.
Can I reclaim VAT on purchases?
If you're VAT registered, you can reclaim VAT on business expenses (input VAT) against the VAT you charge customers (output VAT). Keep all VAT receipts for at least 6 years.
VAT Invoice Requirements
A valid VAT invoice must include:
- Your business name, address, and VAT number
- Customer's name and address
- Unique invoice number
- Invoice date and tax point
- Description of goods/services
- Net amount, VAT rate, VAT amount, and gross total
Making Tax Digital for VAT
Since April 2022, all VAT-registered businesses must keep digital records and submit VAT returns using Making Tax Digital (MTD) compatible software. This applies regardless of your turnover level.
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Use VAT Calculator →VAT Tips for Businesses
- Keep accurate records: Track all sales and purchases with proper VAT invoices
- Claim legitimate expenses: Reclaim VAT on business purchases including equipment, office supplies, and professional services
- Consider voluntary registration: If you have high business costs, registering early lets you reclaim input VAT
- Set aside VAT: Keep collected VAT in a separate account to avoid cash flow problems at payment time
- File on time: Late VAT returns incur penalties and interest charges
UK VAT Explained: Rates, Thresholds, and Business Essentials
Value Added Tax (VAT) is a consumption tax applied to most goods and services sold in the UK. As of 2025/26, the standard VAT rate is 20%, which has been in effect since January 2011. Understanding how VAT works is important for consumers, sole traders, and businesses alike, as it affects pricing, invoicing, and profitability at every level of the supply chain.
The UK operates three VAT rates. The standard rate of 20% applies to most goods and services. The reduced rate of 5% applies to specific items including domestic energy (gas and electricity), children's car seats, smoking cessation products, and the installation of energy-saving materials in homes. The zero rate of 0% applies to most food items, children's clothing and shoes, books and newspapers, public transport, and new residential construction. Zero-rated items are technically "taxable" (unlike exempt items) but at 0%, which is an important distinction for VAT-registered businesses as they can reclaim input VAT on their purchases related to zero-rated sales.
The VAT registration threshold for 2025/26 is £90,000. If your taxable turnover exceeds this amount in any rolling 12-month period, you are legally required to register for VAT. You can also voluntarily register if your turnover is below the threshold, which allows you to reclaim VAT on business purchases but means you must charge VAT on your sales. The deregistration threshold is £88,000, meaning you can apply to deregister if your taxable turnover falls below this figure.
VAT Schemes for Small Businesses
HMRC offers several simplified VAT schemes to reduce the administrative burden on smaller businesses. The Flat Rate Scheme allows eligible businesses (turnover up to £150,000) to pay a fixed percentage of their gross turnover as VAT, without needing to calculate the VAT on every purchase and sale. The percentage varies by industry, ranging from 4% for food retailing to 14.5% for computer and IT consultancy. The Cash Accounting Scheme (for businesses with turnover up to £1.35 million) means you only pay VAT when your customer pays you, rather than when you issue the invoice, improving cash flow for businesses with slower-paying clients.
Making Tax Digital (MTD) for VAT requires all VAT-registered businesses to keep digital records and submit VAT returns through compatible software. This has been mandatory since April 2022 for all VAT-registered businesses, regardless of turnover. Free and low-cost MTD-compatible software is available, making compliance accessible for even the smallest businesses.
Practical VAT Tips for UK Businesses and Consumers
When calculating VAT, remember the key formulas: to add 20% VAT, multiply the net amount by 1.2. To find the VAT amount included in a gross price, divide by 6 (for 20% VAT). To remove VAT from a gross price, divide by 1.2. For the 5% reduced rate, multiply by 1.05 to add VAT, or divide by 21 to find the VAT element, or divide by 1.05 to strip it out. These mental shortcuts are useful for quick checks on invoices and receipts.
Consumers can reclaim VAT on goods purchased in the UK when leaving the country under certain circumstances, though the UK's VAT Retail Export Scheme was closed in January 2021 for personal shoppers. Businesses purchasing goods from the EU after Brexit must now account for import VAT, which can be deferred and reclaimed through their VAT return using Postponed VAT Accounting (PVA), avoiding cash flow issues at the border.
What is the difference between VAT exempt and zero-rated?
Both result in no VAT being charged to the customer, but the distinction matters greatly for businesses. Zero-rated goods (like most food and children's clothing) are technically subject to VAT at 0%, meaning the seller can still reclaim input VAT on their business expenses. VAT-exempt goods and services (like financial services, education, and health services) are outside the VAT system entirely, so the provider cannot reclaim input VAT on related purchases. This makes exempt status potentially more costly for the business.
Do I need to register for VAT if I sell online?
You must register if your taxable turnover exceeds £90,000 in any rolling 12-month period, regardless of whether sales are online or in-person. If you sell digital services to consumers in the EU, you may also need to register for VAT in those countries or use the One Stop Shop (OSS) scheme. Voluntary registration below the threshold can benefit businesses with mainly business-to-business (B2B) sales or significant input VAT to reclaim.
How do I calculate VAT backwards from a total price?
To find the pre-VAT (net) amount from a VAT-inclusive price at 20%, divide the total by 1.2. For example, if an item costs £240 including VAT: £240 divided by 1.2 equals £200 net, with £40 being the VAT. A quick shortcut is to divide the gross amount by 6 to find the VAT element directly: £240 divided by 6 equals £40 VAT. For 5% VAT, divide the total by 1.05 to get the net amount, or divide by 21 to find the VAT portion.
What is the VAT Flat Rate Scheme and could it benefit my business?
Which goods and services are VAT exempt versus zero-rated in the UK?
James Mitchell, ACCA
Chartered Accountant & Former HMRC Advisor
James is a Chartered Certified Accountant (ACCA) specialising in UK personal taxation and financial planning. With over 12 years in practice and a background as a former HMRC compliance officer, he brings authoritative insight to complex tax topics.