UK VAT applies at three different rates depending on the type of good or service — understanding which rate applies to what, and how to correctly add or remove VAT from a price, avoids some of the most common calculation mistakes.
The three rates
Standard rate (20%): most goods and services, in place since January 2011. Reduced rate (5%): specific categories including home energy and children's car seats. Zero-rated (0%): most food, children's clothes, books, and newspapers — technically still "VAT-able" in the legal sense, just at a 0% rate, which matters for certain registration and reclaim rules.
Adding VAT correctly
To add VAT to a net (pre-VAT) price: multiply by 1 plus the rate. A £100 net price at the standard rate becomes £100 × 1.20 = £120 gross.
Removing VAT correctly (the common mistake)
To find the net price from a VAT-inclusive gross price, divide by 1.20 — don't just multiply the gross price by 20% and subtract, which overstates the VAT amount. A £120 gross price divided by 1.20 gives a £100 net price, meaning £20 was VAT — not £120 × 20% = £24, which is the wrong answer for this direction of calculation.
VAT registration threshold
UK businesses must register for VAT once taxable turnover exceeds £90,000 in any rolling 12-month period (the 2026/27 threshold, raised from £85,000 in April 2024) — you have 30 days to register once you cross it. Below that, registration is optional; some small businesses register voluntarily anyway to reclaim VAT on their own purchases, particularly if their customers are mostly VAT-registered businesses who can reclaim the VAT charged. The deregistration threshold, if your turnover later drops, is £88,000. Registering late carries real penalties: 5% of the VAT due if you're up to 9 months late, rising to 10% and then 15% the longer it goes unregistered.
The Flat Rate Scheme — a Simpler Alternative for Small Businesses
Businesses with taxable turnover up to £150,000 can join the Flat Rate Scheme, which replaces the usual "output VAT minus input VAT" calculation with a single fixed percentage of gross (VAT-inclusive) turnover paid directly to HMRC — anywhere from 4% to 14.5% depending on industry. A worked example: a freelance IT consultant invoicing £8,000/month plus VAT (£9,600 gross) would normally pay close to the full £1,600 VAT charged to HMRC under standard accounting. Under the Flat Rate Scheme at the 14.5% IT consultancy rate, they instead pay 14.5% × £9,600 = £1,392/month — a saving of roughly £208/month, plus a 1% discount in the first year of registration.
The scheme isn't automatically better for everyone, though: "limited cost traders" — businesses whose goods purchases are under 2% of turnover or under £1,000/year, which catches many consultants and service providers — must use a 16.5% rate regardless of sector, which often erases the benefit entirely.
Who actually bears the cost
VAT is ultimately paid by the end consumer — businesses along the supply chain generally reclaim VAT they pay on their own purchases, passing the net cost down the chain until it lands on the final buyer.
Add or remove VAT from any price instantly with the VAT Calculator.
Frequently Asked Questions
What's the current UK VAT registration threshold?
£90,000 of taxable turnover in any rolling 12-month period for 2026/27, raised from £85,000 in April 2024. You have 30 days to register once you exceed it.
Is the Flat Rate Scheme always cheaper?
Not always — "limited cost traders" (goods purchases under 2% of turnover or under £1,000/year) must use a 16.5% rate regardless of industry, which often erases the benefit for consultants and service businesses with few physical purchases.
What happens if I register for VAT late?
Penalties apply based on how late: 5% of the VAT due if up to 9 months late, 10% if 9-18 months late, and 15% beyond that, with a minimum penalty of £50.
Can I leave the Flat Rate Scheme and rejoin later?
Yes, but once you leave — voluntarily or by exceeding the £230,000 exit threshold — you can't rejoin for at least 12 months.