Finance · 4 min read

How to Calculate VAT (UK Guide)

Calculating VAT comes down to one multiplication or one division, depending on whether you are starting from a price before tax or a price that already includes it. The VAT calculator handles both directions automatically, but knowing the underlying math means you can check any receipt or invoice by hand.

The standard VAT rate

In the UK, the standard VAT rate is 20%. Some goods and services qualify for a reduced rate of 5%, and some are zero-rated, meaning no VAT is charged at all. Unless you know a product falls into one of the reduced categories, use 20% for a general estimate.

Adding VAT to a net price

To go from a net price (before tax) to a gross price (after tax), multiply by 1.20 at the standard rate.

• Net price: 100.00
• VAT at 20%: 20.00
• Gross price: 120.00

The formula is gross = net x (1 + VAT rate). At the reduced 5% rate, you would multiply by 1.05 instead.

Removing VAT from a gross price

This is the calculation most people get wrong, because dividing by 1.20 gives you the net price, not the VAT amount. If a receipt shows a VAT-inclusive total of 120.00, the net price is 120.00 divided by 1.20, which is 100.00, and the VAT portion is the difference: 20.00.

A shortcut some accountants use for the standard rate is the VAT fraction: divide the gross amount by 6 to get the VAT portion directly, since 20% of a VAT-inclusive total is exactly one sixth of it. On a gross price of 120.00, that gives 120.00 divided by 6, or 20.00, matching the longer method.

Working out the rate from two known amounts

If you know both the net and gross price but not the rate, divide the VAT amount by the net price and multiply by 100. On a net price of 100.00 and a gross price of 120.00, that is 20.00 divided by 100.00, times 100, giving 20%.

Common mistakes

The most frequent error is applying the VAT rate to a gross price when trying to find the VAT included in it. Multiplying 120.00 by 20% gives 24.00, not the correct 20.00, because the rate applies to the net amount, not the total. Divide first to isolate the net price before calculating the VAT portion of a gross figure.

When VAT does not apply

Zero-rated items, including most food, children's clothing and books, and VAT-exempt items such as some financial and insurance services, do not carry any VAT at all, so no calculation is needed for those. Businesses below the VAT registration threshold also do not charge VAT on their sales.

Calculating the reduced 5% rate

Some items, such as home energy in certain circumstances, are charged at the reduced 5% rate rather than the standard 20%. The math works the same way, just with a different multiplier. On a net price of 100.00, VAT at 5% is 5.00, giving a gross price of 105.00. To remove 5% VAT from a gross price, divide by 1.05 rather than 1.20: a gross price of 105.00 divided by 1.05 gives back the 100.00 net price.

Why invoices show VAT separately

VAT-registered businesses are required to show the net price, the VAT amount and the VAT rate separately on an invoice, rather than just a single total. This lets other VAT-registered businesses reclaim the VAT they have paid on purchases, since the amount needs to be identifiable on its own rather than baked into a combined figure. It also makes it straightforward to check that the rate charged matches what the goods or service should carry.

Frequently asked questions