How VAT works in the UK — and how to calculate it
VAT (Value Added Tax) is charged on most goods and services sold in the UK. If you are VAT-registered, you add it to your prices and pass it to HMRC; if you are buying, the VAT is already baked into the price on the shelf. Either way, the maths is the same two formulas — and one of them is the formula most people get wrong.
UK VAT rates: 20%, 5% and 0%
The UK has three VAT rates, plus exempt supplies that sit outside VAT entirely. The rate depends on what is being sold, not on who is selling it, so the first step in any VAT calculation is picking the right rate.
| Rate | What it covers | Multiply net by |
|---|---|---|
| 20% — standard | Most goods and services: electronics, clothing, restaurant meals, professional services, most contractor and freelance invoices. | 1.20 |
| 5% — reduced | Domestic gas and electricity, children's car seats, some energy-saving materials and sanitary products. | 1.05 |
| 0% — zero-rated | Most food, books and newspapers, children's clothing and footwear, public transport fares. | 1.00 |
Zero-rated is not the same as exempt. A zero-rated sale is still a VAT-rated supply at 0%, which means the seller can reclaim the VAT they paid on their own costs. An exempt sale — most financial services, education, and some property transactions — sits outside VAT entirely, and the seller cannot reclaim VAT on related costs. If you are unsure which bucket your sale falls into, check GOV.UK's VAT rates page or ask your accountant: the calculator above can do the arithmetic, but it cannot choose the rate for you.
The £90,000 VAT registration threshold
You only need to register for VAT — and only need to add it to your invoices — once your VAT-taxable turnover passes £90,000 in any rolling 12-month period, or you expect it to pass £90,000 in the next 30 days alone. Below that threshold, registration is voluntary: most sole traders and small limited companies under £90,000 are not VAT-registered and should not be charging VAT. The threshold has held at £90,000 since 1 April 2024, and the deregistration threshold is £88,000 — if your turnover falls below that, you can ask HMRC to cancel your registration. Watch the rolling window, not the tax year: a business can cross the threshold in June and still be liable even if its April-to-April turnover looks safely under.
Worked examples
Add 20% to a £500 net price
A freelancer invoices £500 for a day's work, plus standard-rate VAT.
£500 × 1.20 = £600 gross
VAT: £500 × 20% = £100. The client pays £600; £100 of it is VAT to pass to HMRC.
Add 5% to an £80 net price
A plumber fits an energy-saving material priced at £80 net, at the reduced rate.
£80 × 1.05 = £84 gross
VAT: £80 × 5% = £4. The customer pays £84.
Remove 20% from a £120 gross price
A shop receipt totals £120 including VAT. What was the net price?
£120 ÷ 1.20 = £100 net
VAT inside the price: £120 − £100 = £20. That £20 is one sixth of the gross price.
Remove 5% from a £105 gross price
A gas bill totals £105 including reduced-rate VAT.
£105 ÷ 1.05 = £100 net
VAT inside the price: £105 − £100 = £5. At 5%, the VAT is one twenty-first of the gross price.
Don't subtract 20% to remove VAT. It is the most common VAT mistake in the UK. A £120 price that includes 20% VAT is not £96 net (£120 minus 20% of £120) — it is £100 net, because the VAT was charged on the £100, not on the £120. Subtracting the rate from the gross price understates the net by £4 on every £120, and the error scales with the price: on a £12,000 invoice it is £400. Always divide by 1 plus the rate — £120 ÷ 1.20 — and the calculator above does exactly that.
Mistakes that cost UK businesses money
Charging VAT before registering
Only VAT-registered businesses may charge VAT. If you add 20% to your invoices before you are registered, you have collected tax you are not entitled to collect — and HMRC will want it. Under the £90,000 threshold, leave VAT off and keep the full price.
Using the wrong rate
Food is mostly zero-rated, but a hot takeaway meal is standard-rated; domestic energy is 5%, but business energy is 20%. The boundary cases are where the money is lost. When a product sits near a boundary, check the GOV.UK rate guidance before invoicing.
Rounding line by line
Round to the penny on the invoice total, not on every line. Rounding each line of a 50-line invoice can drift the total by several pence, and the drift always shows up at reconciliation. This calculator rounds the final net, VAT and gross figures, and they always add up: net + VAT = gross.
Treating exempt and zero-rated as the same
Both charge the customer 0% VAT, but only zero-rated sales let you reclaim the VAT on your costs. A business that wrongly treats its sales as exempt gives up its input VAT reclaim — a real cost, hidden in plain sight on every purchase it makes.
What this calculator does not do
This tool covers straightforward UK domestic VAT arithmetic: add VAT to a net price, or remove VAT from a gross price, at 20%, 5%, 0% or a custom rate, rounded to the penny. It does not handle mixed-rate invoices, the Flat Rate Scheme, the reverse charge for cross-border B2B services, import VAT, or the Making Tax Digital filing rules. VAT rates and thresholds change — the standard rate has been 20% since 4 January 2011, but nothing is guaranteed — so verify the current figures with GOV.UK before finalising an invoice or a VAT return.