How UK VAT Works: the 20%, 5% and 0% Rates Explained
Value Added Tax (VAT) is the tax added to most things you buy in the UK. There are three rates you meet in everyday life: a 20% standard rate, a 5% reduced rate, and a 0% zero rate. This guide explains what each rate covers, the difference between net, VAT and gross, how to pull the VAT back out of a price that already includes it, why zero-rated is not the same as exempt, and the turnover point at which a business has to register for VAT.
The three UK VAT rates
Most goods and services are taxed at the 20% standard rate. The 5% reduced rate applies to a defined list of items, and the 0% zero rate covers many essentials. The rate depends on what is being sold, not on who is selling it.
| Rate | Name | Typical coverage |
|---|---|---|
| 20 % | Standard rate | Most goods and services: electronics, clothing for adults, furniture, fuel, professional services, eating out |
| 5 % | Reduced rate | Domestic energy (gas and electricity), children's car seats, mobility aids for older people, some home energy-saving materials |
| 0 % | Zero rate | Most food, books and newspapers, children's clothes and shoes, prescription medicines, public transport |
Net, VAT and gross
Three figures describe any priced item. The net amount (excl. VAT) is the price before tax. The VAT is the tax itself, a percentage of the net. The gross amount (incl. VAT) is the net plus the VAT, which is what a consumer actually pays at the till. On a net price of 100 GBP at 20%, the VAT is 20 GBP and the gross is 120 GBP.
Removing VAT from a gross amount
Shop prices and receipts usually show the gross amount only, so a common task is working backwards to the net and the VAT. You divide the gross by 1 plus the rate, not simply take 20% of the gross. Take a gross price of 120 GBP including 20% VAT. The net is 120 divided by 1.2, which is 100 GBP, and the VAT is the remaining 20 GBP. Taking 20% of 120 would wrongly give 24 GBP, which is why the division matters.
| Step | Amount |
|---|---|
| Gross (incl. 20% VAT) | 120.00 GBP |
| Divide by 1.2 | 100.00 GBP net |
| VAT (gross minus net) | 20.00 GBP |
| Check: net plus VAT | 120.00 GBP |
Zero-rated is not the same as exempt
Zero-rated and exempt both mean no VAT is charged to the customer, but they are different in law. Zero-rated supplies (most food, books, children's clothes) are taxable at 0%, so a VAT-registered business still counts them as taxable sales and can reclaim the VAT it pays on its own costs. Exempt supplies (such as insurance, postage stamps, and some property and finance) sit outside VAT entirely, so a business making only exempt sales cannot register and cannot reclaim the VAT on related costs. The practical difference matters most to businesses rather than to shoppers.
The 90,000 GBP VAT registration threshold
A business must register for VAT once its taxable turnover passes 90,000 GBP in any rolling 12-month period, or if it expects to pass that figure within the next 30 days. Below the threshold, registration is voluntary, which some businesses choose so they can reclaim the VAT on their costs. Once registered, a business charges VAT on its standard and reduced-rate sales, and submits a VAT return to HMRC, usually every quarter.
Try the VAT Calculator toolCalculate UK VAT fast. Enter a net amount (excl. VAT) or a gross amount and get the full breakdown at the 20% standard rate, the 5% reduced rate, or the 0% zero rate.Related articles