What is VAT?
Value Added Tax (VAT) is a tax on most goods and services sold by VAT-registered businesses in the UK. The business adds VAT to its prices, collects it from customers and pays it to HMRC, usually every quarter. Businesses can generally reclaim the VAT they pay on their own purchases, so the tax is ultimately borne by the final consumer.
Prices are described as net or excluding VAT (before VAT) and gross or including VAT (what the customer pays). Shops selling to consumers must show prices including VAT; business-to-business quotes are often shown excluding VAT.
UK VAT rates for 2026
There are three VAT rates in the UK. Which one applies depends on what is being sold:
- Zero-rated is not the same as exempt. Zero-rated sales are taxable at 0%, so the seller can still reclaim VAT on costs. Exempt supplies, such as most insurance, financial services, postage stamps and many health and education services, are outside VAT entirely.
- Rates and categories can change in a Budget. Use the Other option for a different rate, for example when working with another country's VAT.
| Rate | Examples |
|---|---|
| 20% standard rate | Most goods and services: electronics, adult clothing, furniture, restaurant meals, hot takeaway food, petrol, most professional services, private school fees |
| 5% reduced rate | Domestic gas and electricity, children's car seats, mobility aids for older people, some home energy and renovation work |
| 0% zero rate | Most food and groceries, children's clothes and shoes, books and newspapers (including e-books), public transport fares, prescriptions |
How to add VAT: the formula
VAT = net price × rate ÷ 100
Gross price = net price × (1 + rate ÷ 100)
So to add 20% VAT you multiply by 1.2, and to add 5% VAT you multiply by 1.05.
How to remove VAT: the formula and the VAT fraction
Net price = gross price ÷ (1 + rate ÷ 100)
VAT = gross price − net price
To take 20% VAT out of a price, divide by 1.2. HMRC also uses the VAT fraction: the share of a VAT-inclusive price that is VAT. At 20% the VAT fraction is 1/6 (20 ÷ 120), and at 5% it is 1/21 (5 ÷ 105).
The most common mistake is to calculate 20% of the gross price. That gives too much VAT, because VAT is 20% of the net price, not of the total.
Worked example 1: adding 20% VAT to an invoice
Net price £250, VAT rate 20%
VAT = £250 × 20 ÷ 100 = £50
Price including VAT = £250 × 1.2 = £300
Worked example 2: removing VAT from a receipt
Price including VAT £1,440, VAT rate 20%
Net price = £1,440 ÷ 1.2 = £1,200
VAT = £1,440 − £1,200 = £240 (the same as £1,440 × 1/6)
Wrong method: £1,440 × 20% = £288, which overstates the VAT by £48
Worked example 3: VAT on a 5% energy bill
Electricity bill £84 including VAT, VAT rate 5%
Net amount = £84 ÷ 1.05 = £80
VAT = £84 − £80 = £4 (the same as £84 × 1/21)
Worked example 4: rounding to the penny
Net price £99.99, VAT rate 20%
VAT = £99.99 × 0.2 = £19.998, rounded to £20.00
Price including VAT = £119.99
HMRC allows VAT to be rounded to the nearest penny on each line or on the invoice total, provided you are consistent, so totals can differ by a penny or two.
VAT registration and other things to know
- VAT registration threshold: you must register if your VAT-taxable turnover over the last 12 months goes over £90,000, or you expect it to in the next 30 days. You can deregister if it falls below £88,000.
- Voluntary registration is possible below the threshold, which lets you reclaim VAT on costs but means charging VAT to customers.
- Flat Rate Scheme: small businesses can pay a fixed percentage of their gross turnover instead of calculating VAT on each sale and purchase; this calculator does not apply flat rates.
- VAT invoices must show the net amount, the VAT rate, the VAT amount and your VAT registration number.
- Mixed baskets: if an invoice has items at different rates, calculate VAT separately for each rate.
- Northern Ireland follows some EU VAT rules for goods under the Windsor Framework, but the rates are the same as the rest of the UK.