UK VAT Rates Explained: 20%, 5% and 0% with Worked Examples

VAT is a tax on most goods and services sold in the UK, charged at each stage of a supply chain but ultimately paid by the final consumer. The rules are not a single rate: there are three rates plus a separate category of exempt supplies, and the difference costs real money on an invoice.

The Three VAT Rates

Rate	Applies to	Typical examples
Standard 20%	Most goods and services	Electronics, clothing for adults, professional services, restaurant meals
Reduced 5%	Specific goods and services	Domestic energy, children's car seats, some mobility aids, energy-saving materials
Zero 0%	Specific goods, still VATable	Most food, books, newspapers, children's clothing, public transport

A zero-rated item is not the same as an exempt item. Zero-rated supplies are taxable at 0%, which means you still record them on a VAT return and can usually reclaim the VAT on your costs. Exempt supplies, such as insurance, most education, healthcare and financial services, sit outside the VAT system, and VAT on related costs is generally not recoverable.

That distinction matters for businesses. A bookshop selling zero-rated books can reclaim VAT on rent, shelves and electricity. A private school or an insurer cannot usually reclaim VAT on its costs, which is why VAT status shapes pricing in those sectors.

How to Add VAT

To add 20% VAT to a net price, multiply by 1.2:

• Net £100 → VAT £20 → gross £120
• Net £250 → VAT £50 → gross £300
• Net £1,450 → VAT £290 → gross £1,740

At 5%, multiply by 1.05. A £200 net energy bill becomes £210 gross.

How to Remove VAT

To strip VAT out of a gross price, divide by 1.2 instead of subtracting 20%:

• Gross £120 → net £100 → VAT £20
• Gross £300 → net £250 → VAT £50
• Gross £1,740 → net £1,450 → VAT £290

Subtracting 20% from a gross figure is the most common VAT mistake. £120 minus 20% is £96, not £100, because the 20% applies to the net amount, not the gross.

At 5%, divide by 1.05. The free UK VAT Calculator does both directions instantly, including custom rates, so you can check a receipt or build an invoice line without doing the arithmetic by hand.

Who Has to Register for VAT

You must register if your taxable turnover goes over £90,000 in any rolling 12-month period, or if you expect it to in the next 30 days. You can also register voluntarily below that threshold, which can be worth doing if you sell mostly zero-rated goods and want to reclaim input VAT, or if your customers are VAT-registered businesses that do not mind the extra 20%.

Once registered you charge VAT on your sales, file returns (usually quarterly) and pay the difference between output VAT collected and input VAT paid on purchases. You can deregister if turnover falls below £88,000.

Special Schemes Worth Knowing

• Flat Rate Scheme. For businesses with turnover under £150,000, you charge 20% but pay a fixed percentage of gross turnover to HMRC, which simplifies record keeping. The percentages changed in 2017 and the scheme is less generous than it used to be for low-cost businesses.
• Cash accounting. Account for VAT when money actually moves rather than when you invoice, which helps cash flow if customers pay slowly.
• Annual accounting. One return a year with interim payments, useful for very small businesses.
• Margin scheme. For second-hand goods, antiques and some cars, VAT is charged on the margin rather than the full selling price.

What a VAT Invoice Must Show

A valid VAT invoice needs the supplier's name, address and VAT number, a unique invoice number, the date, the customer's name and address, a description of the goods or services, the net amount, the VAT rate, the VAT amount and the total. Without those, a business customer cannot reclaim the VAT.

If you invoice clients, the free invoice generator lays out those fields for you, and you can run the totals through the UK VAT Calculator before sending.

Common Questions in Practice

Is VAT charged on top of the advertised price? For consumers, prices must be shown inclusive of VAT, so the shelf price is the price you pay. Business-to-business quotes are often shown net of VAT, with the VAT added on the invoice.

Can I reclaim VAT on everything? No. You can reclaim VAT on business purchases, but not on entertaining clients, and not on goods bought for private use. If something is used for both, you apportion the claim.

Does digital work count? Digital services sold to UK consumers are subject to VAT, and cross-border sales have their own place-of-supply rules. If you sell apps, courses or downloads, check whether you need to register.

What about food? Most food is zero-rated, but catering, hot takeaway food, alcohol, confectionery and soft drinks are standard-rated. That is why a supermarket sandwich is zero-rated and a hot one from the same shop is not.

Where VAT Fits With Income Tax

VAT is collected on behalf of HMRC and is not your money, so it never appears in your profit. Income tax and National Insurance are charged on profit after VAT has been removed. If you are working out what you keep, the UK Income Tax Calculator and National Insurance Calculator handle the personal side, while the UK Tax Calculators hub keeps all three tools together.