How VAT works

VAT (Value Added Tax) is a tax added to the price of most goods and services in the UK. The main rate is 20%, with a reduced rate of 5% and a zero rate of 0% on certain items. To add VAT to a net price you multiply by 1.2; to take VAT off a gross price you divide by 1.2, not subtract 20%. So £100 plus VAT is £120, and £120 including VAT is £100 net plus £20 of VAT.

What VAT is

VAT (Value Added Tax) is a tax charged on the sale of most goods and services in the UK. It is added to the price you pay, so when you buy a £120 gadget on the high street, part of that price is VAT going to HM Revenue and Customs (HMRC). You rarely see it spelled out as a shopper, because retail prices to consumers are quoted with VAT already included.

It is a tax on spending rather than on income. The business selling to you collects it and hands it to HMRC, which is why VAT is sometimes called an indirect tax: you pay it, but the shop passes it on for you. It is the UK's version of the sales tax you might see added at the till in other countries.

The three rates

Which rate applies depends on what is being sold:

• Standard rate, 20%. The default for most goods and services, from electronics to a meal out. If a sale does not fall into one of the categories below, it is standard-rated.
• Reduced rate, 5%. A lower rate on specific things, including domestic energy (the gas and electricity for your home), children's car seats and some home insulation.
• Zero rate, 0%. VAT is charged, but at nothing. Covers items the government chooses not to tax, such as most food, books and children's clothes.

The standard rate has been 20% since January 2011. The reduced and zero rates are fixed in law and apply only to defined categories, so most of what you buy day to day sits at 20%.

Exempt vs zero-rated

These two sound the same to a shopper, because either way you pay no VAT, but they are different for the business and worth naming clearly.

• Zero-rated items are still inside the VAT system, at a rate of 0%. The business charges no VAT on the sale, but because the item is VAT-able, it can still reclaim the VAT on the costs of making or buying it. Most food and children's clothes are zero-rated.
• Exempt items are outside the VAT system entirely. No VAT is charged on the sale, and the business cannot reclaim the VAT on the costs linked to those sales. Insurance, postage stamps and some property transactions are exempt.

The practical difference is that reclaim. A zero-rated business stays in the system and recovers its input VAT; an exempt one does not. That can affect whether a business even needs to register at all.

How to add VAT

To add VAT to a net price (the amount before VAT), multiply by one plus the rate. At the standard 20% rate that means multiplying by 1.2:

gross = net × 1.2

So a net price of £100 becomes £100 × 1.2 = £120. The £20 difference is the VAT. For the reduced 5% rate you would multiply by 1.05 instead, so £100 net becomes £105.

How to remove VAT

Removing VAT is where people slip up. To find the net price from a gross (VAT-inclusive) price, you divide by one plus the rate, not subtract the percentage. At 20% that means dividing by 1.2:

net = gross ÷ 1.2

Take a £120 price that includes VAT. Divide by 1.2 and you get £100 net, which leaves £20 of VAT. That matches the example above, which is the point: the maths has to work both ways.

Subtracting 20% gives the wrong answer. Knocking 20% off £120 gives £96, because the 20% was originally added to the smaller £100 net figure, not to the £120 gross. The gap looks small here but grows with the price. Our VAT calculator does this both ways and at any rate, so you can add or remove VAT without second-guessing the arithmetic.

The £90,000 registration threshold

Not every business charges VAT. You must register with HMRC once your taxable turnover (the total of your VAT-able sales, not your profit) passes £90,000 in any rolling 12-month period, or if you expect to pass it within the next 30 days.

Below £90,000 you can register voluntarily. Some small businesses do, because registering lets them reclaim the VAT on their own purchases, though it also means charging VAT on their sales, which can make them look pricier to customers who cannot reclaim it. There is also a Flat Rate Scheme: smaller businesses can pay HMRC a fixed percentage of their turnover instead of tracking VAT on every transaction.

Who charges and reclaims it

A VAT-registered business plays two roles at once. On its sales it charges VAT, called output tax. On its purchases it pays VAT, which it can claim back, called input tax. When it files its VAT return, it pays HMRC the difference: output tax it has collected minus input tax it has paid. If it has paid more VAT than it has charged, HMRC refunds the difference.

Because each business reclaims the VAT on its costs, the tax is not really borne along the chain. It lands on the final consumer, who buys for personal use and cannot reclaim anything. That is why the price you pay in a shop is the one that carries the full VAT.

VAT is collected by businesses as well as paid by individuals, so it sits alongside other business taxes. If you are weighing up the wider tax on a company and its owners, our corporation tax calculator and dividend tax calculator cover the profit and payout side.

Common questions

How do I add 20% VAT to a price?

Multiply the net price (the amount before VAT) by 1.2. So £100 plus 20% VAT is £100 × 1.2 = £120. The £20 difference is the VAT. For the reduced 5% rate you multiply by 1.05 instead.

How do I remove VAT from a price?

Divide the gross price (the amount including VAT) by 1.2 at the standard rate. So £120 including VAT is £120 ÷ 1.2 = £100 net, leaving £20 of VAT. Do not subtract 20%: taking 20% off £120 gives £96, which is wrong, because the 20% was added to the smaller net figure, not the gross.

What are the current UK VAT rates?

There are three: the standard rate of 20% on most goods and services, the reduced rate of 5% on things like domestic energy and children's car seats, and the zero rate of 0% on items like most food and children's clothes. A separate group of items, such as insurance and postage stamps, is exempt from VAT altogether.

What is the difference between zero-rated and exempt?

Both mean the customer pays no VAT, but they work differently for the business. Zero-rated goods are still inside the VAT system at a 0% rate, so a business can reclaim the VAT on its related costs. Exempt goods are outside the system, so the business charges no VAT and cannot reclaim the VAT on costs linked to them.

When do I have to register for VAT?

You must register once your taxable turnover passes £90,000 in any rolling 12-month period, or if you expect to pass it in the next 30 days. Below that you can still register voluntarily, which lets you reclaim VAT on purchases but means charging VAT on your sales.

Who actually pays VAT to HMRC?

VAT-registered businesses collect it and pass it on. They charge VAT on their sales (output tax) and reclaim the VAT on their purchases (input tax), then pay HMRC the difference. The cost ends up with the final consumer, who cannot reclaim it.

About this article

Written by the calcd team. We build UK money calculators and explain the numbers behind them in plain English. We checked the rates, the £90,000 registration threshold and the way VAT is collected against gov.uk and HMRC, the primary sources for UK VAT. The VAT arithmetic here is standard maths, and any worked figure is an estimate to help you plan, not financial advice. VAT rules on specific goods and on registration can be detailed, so confirm your own position with HMRC or a qualified accountant. Last updated June 2026.