VAT calculator › How VAT works

How VAT works

A plain-English guide to VAT: the 20%, 5% and 0% rates, adding and removing VAT, the £90,000 registration threshold and returns.

Last updated: 5 November 2026 · Based on HMRC 2026/27 rates

What is VAT?

Value Added Tax (VAT) is a tax on most goods and services sold in the UK. It is charged by VAT-registered businesses, added to the price the customer pays, and handed on to HMRC. Although businesses collect it, the cost ultimately lands on the final consumer — which is why prices for the public are normally quoted including VAT.

The three VAT rates

RateApplies to
20% standardMost goods and services — including catering, hot takeaway food, alcohol, confectionery and ice cream
5% reducedDomestic gas across the UK; qualifying domestic electricity in Northern Ireland. Children's car seats.
0% zeroMost food, books and newspapers, children's clothes, passenger transport in vehicles with 10 or more seats, and — until 31 March 2027 — installing energy-saving materials such as insulation, solar panels and heat pumps in homes. Qualifying domestic electricity in England, Scotland and Wales from 1 October 2026. HMRC guidance includes an announced extension to 30 June 2027 inclusive.

The extension for April to June 2027 was announced at Budget 2026 and is subject to implementing legislation. Budget 2026 OOTLAR, section 2.20.

“Zero-rated” and “exempt” are different. Zero-rated sales are still VAT-taxable (at 0%) — they count towards the £90,000 threshold and you can reclaim input VAT on the costs. Exempt sales (insurance, education, health, postage stamps) are outside the reclaim system entirely.

Adding and removing VAT — the maths

To add 20% VAT, multiply the net price by 1.2: £100 becomes £120. To remove it from a VAT-inclusive price, divide by 1.2: £120 ÷ 1.2 = £100 net, so the VAT inside is £20.

Example — invoice of £2,400 including VAT
Gross (inc. VAT)£2,400
Net = £2,400 ÷ 1.2£2,000
VAT = £2,400 × 1/6£400

The common mistake: taking 20% off

Removing VAT is not the same as knocking 20% off the price. The 20% is charged on the net price, so the VAT inside a VAT-inclusive price is one-sixth of it — 16.67% — not a fifth. Taking 20% off removes too much.

£120 including VATNet priceVAT
Right: £120 ÷ 1.2£100£20
Wrong: £120 × 0.8£96£24

At the 5% rate the same logic applies: divide by 1.05, and the VAT inside a VAT-inclusive price is one twenty-first of it (£5 in £105).

The £90,000 registration threshold

You must register for VAT when your VAT-taxable turnover passes £90,000— measured over any rolling 12 months, not your accounting year. There are two tests:

  • Looking back: your taxable turnover for the last 12 months went over £90,000. Register within 30 days of the end of the month you went over; you are registered from the first day of the second month after it.
  • Looking ahead: you expect your turnover in the next 30 days alone to go over £90,000. Register by the end of those 30 days; you are registered from the date you realised, not the date the turnover arrives.
Example — the two tests with dates
Turnover for the 12 months to 31 October 2026 reaches £91,200, over £90,000 for the first timeRegister by 30 November 2026; VAT-registered from 1 December 2026
On 1 June you agree a single £100,000 contract, paid at the end of JuneRegister by 30 June; VAT-registered from 1 June

If your turnover later falls below £88,000 you can ask HMRC to cancel your registration. Businesses can also register voluntarily below the threshold — worth it if your customers are VAT-registered and you want to reclaim VAT on your costs.

The Flat Rate Scheme in numbers

With VAT turnover up to £150,000 (excluding VAT) you can join the Flat Rate Scheme. You still charge customers 20%, but pay HMRC a fixed percentage of your VAT-inclusive turnover and keep the difference. In return you generally can't reclaim VAT on purchases, except capital assets over £2,000. The headline rate depends on your sector, but a “limited cost business” — one whose spending on goods is under 2% of turnover or under £1,000 a year — pays 16.5% whatever its sector.

Example — IT consultant billing £60,000 a year plus VAT (£72,000 including VAT), with £2,500 of costs carrying £500 of VAT
How the VAT is worked outPaid to HMRCAgainst standard
Standard: £12,000 charged − £500 reclaimed£11,500—
Flat rate for computer and IT consultancy: 14.5% × £72,000£10,440£1,060 less
First year as VAT-registered: 13.5% × £72,000£9,720£1,780 less
Limited cost business: 16.5% × £72,000£11,880£380 more

The catch is the last row. A consultant whose costs are mostly services rather than goods is likely to be a limited cost business, and then the scheme costs more than ordinary VAT accounting. Check which rate you would really pay before joining.

VAT returns and Making Tax Digital

Registered businesses file a VAT return (usually quarterly) showing output tax charged and input tax reclaimed, and pay the difference. All VAT-registered businesses must keep digital records and file through Making Tax Digital (MTD)-compatible software.

Making Tax Digital for Income Tax is a separate scheme with its own rules: whether a sole trader or landlord must use it depends on their self-employment and property income, not on VAT registration. Making Tax Digital for Income Tax explains who it applies to and when.

Tip: price carefully around the threshold. If you sell to the public and can't raise your prices, registering means one-sixth of your takings goes to HMRC: £90,000 of VAT-inclusive sales becomes £75,000 of income. That is why many small businesses plan their turnover to stay just below £90,000.

Frequently asked questions

What is the VAT registration threshold?

You must register once your VAT-taxable turnover passes £90,000 in any rolling 12-month period, or if you expect to pass it within the next 30 days alone. The deregistration threshold is £88,000. You can also register voluntarily below the threshold.

What are the UK VAT rates?

The standard rate is 20% and covers most goods and services. The reduced rate of 5% covers things like children's car seats. For household bills, domestic gas is taxed at 5% across the UK. Qualifying domestic electricity in England, Scotland and Wales is zero-rated from 1 October 2026 to 31 March 2027. HMRC guidance includes an announced extension to 30 June 2027 inclusive. The extension for April to June 2027 was announced at Budget 2026 and is subject to implementing legislation. In Northern Ireland, qualifying domestic electricity currently carries 5% VAT. The zero rate (0%) covers most food, books, newspapers and children's clothes and, until 31 March 2027, installing energy-saving materials such as insulation, solar panels and heat pumps in homes. Some things, like insurance, education and postage stamps, are exempt entirely.

How do I add or remove VAT from a price?

To add 20% VAT, multiply the net price by 1.2. To find the VAT inside a gross price, divide by 1.2 to get the net, or multiply the gross by 1/6 to get the VAT itself. For 5% VAT, use 1.05 and 1/21. Taking 20% off a VAT-inclusive price is a common mistake: it removes too much.

Can I claim VAT back?

If you are VAT-registered, you reclaim the VAT you pay on business purchases (input tax) against the VAT you charge customers (output tax) on each return. You pay HMRC the difference — or receive a refund if you reclaimed more than you charged.

What is the Flat Rate Scheme?

A simplification for small businesses with VAT turnover up to £150,000 (excluding VAT): you charge customers 20% as normal but pay HMRC a fixed percentage of your VAT-inclusive turnover and keep the difference, instead of tracking every purchase. You generally can’t reclaim VAT on purchases, except capital assets over £2,000. A business that spends little on goods counts as a “limited cost business” and pays 16.5% whatever its sector.

Sources — official UK figures

Household energy VAT checked on 5 November 2026; other rates, thresholds and scheme percentages checked on 26 September 2026 · How we calculate →

Add or remove VAT in seconds.

VAT calculator →