1. What Is VAT?
VAT (Value Added Tax) is a consumption tax charged on most goods and services sold in the UK. The standard rate in 2025 remains 20%, with reduced and zero rates for specific products.
2. Standard VAT Rates in the UK (2025)
- Standard Rate: 20% (most goods and services)
- Reduced Rate: 5% (e.g., children’s car seats, home energy)
- Zero Rate: 0% (e.g., food, books, children’s clothes)
- Exempt: Some services (e.g., education, insurance)
3. VAT Calculation Formula (Standard Rate 20%)
To Add VAT to a Net Price
Use this formula:
VAT = Net Price × 20% (or 0.20)
Gross Price = Net Price × 1.20
Example:
Net Price = £100
VAT = £100 × 0.20 = £20
Gross Price = £100 + £20 = £120
To Extract VAT from a Gross Price
Use this formula:
VAT = Gross Price × 20 / 120
Net Price = Gross Price × 100 / 120
Example:
Gross Price = £120
VAT = £120 × 20 / 120 = £20
Net Price = £120 – £20 = £100
4. VAT Formula Summary
- Add VAT: Net Price × 1.20
- Extract VAT: Gross Price ÷ 1.20 (to get Net), then Gross – Net = VAT
- VAT Amount:
- From Net: Net × 0.20
- From Gross: Gross × 20 / 120
5. Frequently Asked Questions
1. What’s the easiest way to calculate VAT manually?
Multiply the net price by 0.20 for VAT, or by 1.20 for the gross total.
2. Is VAT calculated on the total invoice or per item?
Either method is accepted—just ensure the totals match the overall VAT rate.
3. Do I charge VAT if I’m not registered?
No. Only VAT-registered businesses can charge VAT.
4. Is there a VAT calculator tool available?
Yes, many free VAT calculator tools exist online for UK rates.
5. What if my product is zero-rated or exempt?
You still record the sale, but no VAT is added or charged.
6. Can I reclaim VAT on business purchases?
Yes, if you’re VAT-registered and the purchase is VAT-eligible.
Conclusion
Understanding the VAT calculation formula is crucial for accurate pricing and compliance in the UK. Whether adding VAT to invoices or extracting it from receipts, these simple formulas ensure you remain on the right side of HMRC and maintain clean financial records.