VAT calculations are needed every day by freelancers, small business owners, tradespeople, and anyone comparing prices shown with or without tax. This guide explains exactly how to add or remove VAT at every UK rate, with worked examples and the key rules for 2026/27.
For the full PocketWise guide to self-employment tax (including VAT registration and returns), see the Self-Employment Hub.
How to calculate VAT: the formula
Adding VAT to a net price (net → gross)
To add 20% VAT:
Gross price = Net price × 1.20
| Net (ex-VAT) | VAT (20%) | Gross (inc-VAT) |
|---|---|---|
| £50.00 | £10.00 | £60.00 |
| £100.00 | £20.00 | £120.00 |
| £250.00 | £50.00 | £300.00 |
| £1,000.00 | £200.00 | £1,200.00 |
| £4,500.00 | £900.00 | £5,400.00 |
To add 5% VAT: multiply the net price by 1.05
To add 0% VAT: the gross and net prices are the same
Removing VAT from a gross price (gross → net)
To remove 20% VAT:
Net price = Gross price ÷ 1.20
The VAT element alone = Gross price × 1/6 (approximately 0.16667)
| Gross (inc-VAT) | VAT element | Net (ex-VAT) |
|---|---|---|
| £60.00 | £10.00 | £50.00 |
| £120.00 | £20.00 | £100.00 |
| £300.00 | £50.00 | £250.00 |
| £1,200.00 | £200.00 | £1,000.00 |
| £5,400.00 | £900.00 | £4,500.00 |
To remove 5% VAT: divide by 1.05; VAT element = gross × 1/21
Common mistake: People often take 20% off a gross price and get the wrong answer. £120 × 20% = £24 — wrong. The correct answer is £120 ÷ 1.20 = £100 net, meaning £20 VAT (not £24). Always divide by 1.20 to remove VAT.
UK VAT rates 2026/27
| Rate | % | What it applies to |
|---|---|---|
| Standard | 20% | Most goods and services |
| Reduced | 5% | Domestic fuel and power (gas, electricity), children’s car seats, some mobility aids, smoking cessation products (patches, gum), some renovations and conversions |
| Zero | 0% | Most food, children’s clothing (under 14), books and newspapers, prescription drugs, public transport, caravans used as main homes |
| Exempt | N/A | Insurance, financial services, postal services, education, health services, betting and gaming |
The difference between zero-rated and exempt
Zero-rated and exempt may sound similar — neither results in a VAT charge to the customer — but they behave differently for the business:
- Zero-rated: VAT is charged at 0%; the business can still reclaim input VAT on its costs
- Exempt: No VAT is charged; the business cannot reclaim input VAT on related costs
This distinction matters if you run a business that makes both exempt and taxable supplies (for example, a company providing both financial advice and consultancy). Partial exemption rules apply and may need an accountant.
VAT registration: the key numbers
| Threshold | Amount | Notes |
|---|---|---|
| Mandatory registration threshold | £90,000 | If taxable turnover exceeds this in any 12-month rolling period |
| Deregistration threshold | £88,000 | Can deregister if turnover falls below this |
| Voluntary registration | Below £90,000 | Option if you sell mainly to VAT-registered businesses |
Voluntary registration can be advantageous if:
- Most of your customers are VAT-registered businesses (they can reclaim the VAT you charge)
- You make significant purchases with VAT on them that you’d like to reclaim
- You want to appear more established to corporate clients
Voluntary registration is usually not advantageous if:
- Most of your customers are consumers or non-VAT-registered small businesses
- Your margins are tight and absorbing VAT would make you uncompetitive
VAT for common business types
Tradespeople and contractors
If you’re a plumber, electrician, builder, or similar, the standard 20% rate applies to most of your work. However, certain residential conversions and renovations may qualify for the 5% reduced rate — for example, converting a non-residential building into a home or renovating a property that has been empty for two or more years.
Freelancers and consultants
Professional services (design, copywriting, IT, marketing, management consulting) are standard-rated at 20%. If your annual turnover is below £90,000 you don’t have to register, but if your clients are mainly businesses, voluntary registration is often beneficial.
Online sellers and e-commerce
If you sell goods through platforms like Amazon, eBay, or Etsy and exceed £90,000 turnover, standard VAT rules apply. If you also sell to EU customers, post-Brexit rules apply — you may need to register for VAT in individual EU countries (or use the EU OSS scheme) if you sell to EU consumers.
VAT on digital services
If you sell digital services (ebooks, software, online courses) to consumers in the UK, 20% VAT applies. For EU consumers, you charge the VAT rate of the customer’s country.
VAT returns and payment
VAT-registered businesses must:
- Charge VAT on taxable supplies (output tax)
- Pay VAT to HMRC on purchases (input tax)
- Submit a VAT return (usually quarterly) reporting the difference — output tax minus input tax
- Pay the net balance to HMRC or claim a repayment if input tax exceeds output tax
All VAT returns must be submitted through HMRC’s Making Tax Digital (MTD) for VAT system using compatible accounting software.
Common VAT calculation questions
I’m buying a used car — does VAT apply?
If you’re buying from a private seller: no VAT. If you’re buying from a VAT-registered dealer: VAT is usually included in the advertised price. Dealers may use the VAT Margin Scheme for second-hand goods, meaning they only pay VAT on their profit margin rather than the full sale price.
Is VAT charged on property?
Residential property sales are exempt from VAT. New residential builds are zero-rated, allowing developers to reclaim input VAT. Commercial property sales are more complex — the seller can opt to tax a commercial property, making its sale standard-rated.
Can I reclaim VAT on a business car?
Generally, no. Input VAT on cars available for private use cannot be reclaimed. Vans and commercial vehicles are treated differently — input VAT is fully reclaimable if used exclusively for business.