What Is VAT and How Is It Calculated in the UK?
A plain-English guide to UK VAT — the current rates, how to add and remove VAT, when businesses must register, and how to use a VAT calculator.
VAT (Value Added Tax) appears on almost every purchase you make in the UK, yet the mechanics of it are poorly understood by many people — and even by some small business owners who need to manage it.
This guide explains the current UK VAT rates, how the maths works, and when it matters to you.
Use our VAT Calculator to add or remove VAT from any price instantly.
What Is VAT?
VAT is a consumption tax applied to most goods and services sold in the UK. It is collected at each stage of the supply chain, with businesses charging it to their customers and then remitting it to HMRC, minus the VAT they have already paid to their own suppliers (this is called reclaiming input tax).
For consumers, VAT is simply part of the price you pay. For VAT-registered businesses, it involves regular reporting and payment to HMRC.
UK VAT Rates (2025)
| Rate | Percentage | What it applies to |
|---|---|---|
| Standard rate | 20% | Most goods and services |
| Reduced rate | 5% | Domestic energy, children’s car seats, some home energy-saving products |
| Zero rate | 0% | Most food, children’s clothing, books, printed newspapers |
| Exempt | N/A | Financial services, insurance, education, health services |
The standard rate of 20% has been in place since January 2011, when it rose from 17.5%.
Zero-rated vs exempt: Zero-rated goods are still subject to VAT legislation — businesses can still reclaim input tax on zero-rated supplies. Exempt supplies fall outside the VAT system entirely.
How to Add VAT
To find the VAT-inclusive price from a net (ex-VAT) figure:
VAT-inclusive price = net price × 1.20 (at 20%)Example: A product costs £85.00 net.
- VAT = £85.00 × 0.20 = £17.00
- VAT-inclusive price = £85.00 + £17.00 = £102.00
How to Remove VAT (Reverse VAT)
To find the net price from a VAT-inclusive figure:
Net price = VAT-inclusive price ÷ 1.20 (at 20%)Example: A price tag shows £120.00 including VAT.
- Net price = £120.00 ÷ 1.20 = £100.00
- VAT amount = £120.00 − £100.00 = £20.00
A common mistake is to calculate 20% of £120 (which gives £24, not £20). The correct method is always to divide by 1.20, not subtract 20% of the gross figure.
When Must a Business Register for VAT?
A business must register for VAT when its taxable turnover exceeds the VAT registration threshold in any rolling 12-month period. The threshold for 2024/25 is £90,000 (rising from £85,000 in April 2024).
Once registered, a business must:
- Charge VAT on taxable supplies to customers
- File VAT returns (usually quarterly) via Making Tax Digital (MTD)
- Pay any VAT owed to HMRC within set deadlines
- Keep detailed VAT records
Businesses below the threshold can voluntarily register, which allows them to reclaim input tax — this can be advantageous if your business makes significant VAT-able purchases.
Flat Rate Scheme
Smaller businesses (turnover under £150,000) may be eligible for the VAT Flat Rate Scheme, where instead of calculating VAT on every transaction, they pay a fixed percentage of gross turnover to HMRC. The percentage varies by business sector.
The flat rate scheme simplifies VAT administration but is not always more cost-effective — it depends on your sector percentage and how much input tax you would normally reclaim.
VAT for Consumers
As a consumer, VAT is built into the prices you see in shops and on websites. By law, retailers must display prices inclusive of VAT. If you see a price excluding VAT — which sometimes happens in trade-focused or B2B contexts — you need to add 20% to get the actual amount you will pay.
Our VAT Calculator handles both directions instantly — add VAT to a net price or strip VAT from a gross price.