UK VAT Rates 2025: Standard 20%, Reduced 5% and Zero-Rated Explained

Value Added Tax in the UK has three main rates. The standard rate is 20%, applied to most goods and services. The reduced rate is 5%, used for items like domestic fuel and children's car seats. The zero rate is 0%, applied to essentials like most food, children's clothing, and books. A separate category, exempt supplies, includes items like insurance and education where VAT is not charged and input VAT cannot usually be recovered.

Getting the rate wrong on an invoice costs money. Charge 20% when you should charge 5% and your customer overpays. Charge 5% when 20% applies and HMRC can assess the difference plus interest. Use our UK VAT calculator to add or remove VAT at the correct rate before you raise an invoice.

The standard 20% rate

Most business-to-business and business-to-consumer sales attract VAT at 20%. If you quote a net price of £1,000 to a VAT-registered customer, you add £200 of VAT and invoice £1,200 gross. If you quote a gross price of £1,200 inclusive of VAT, the net amount is £1,000 and the VAT element is £200. The calculation is the same in both directions but the starting point differs.

To remove VAT from a gross price, divide by 1.20 rather than multiplying by 0.80. A common mistake is to take 20% of the gross figure, which understates the net amount. £1,200 divided by 1.20 is £1,000. Twenty per cent of £1,200 is £240, which is wrong because the VAT is 20% of the net, not the gross.

The reduced 5% rate

The reduced rate applies to a specific list of supplies. Domestic fuel and power for residential use qualify. Energy-saving materials installed in residential property can qualify in some circumstances. Children's car seats and mobility aids for the elderly qualify. A supply of goods and services together, such as a renovation project, may split between 20% and 5% depending on the work.

On a £500 net heating bill, 5% VAT is £25, giving a gross total of £525. At 20%, the VAT would be £100. Using the wrong rate on energy bills is a frequent error for businesses that supply both commercial and residential customers. Commercial energy is standard rated. Domestic energy is reduced rated.

The UK VAT calculator lets you switch between standard and reduced rates to compare amounts on the same net price.

Zero-rated supplies

Zero-rated means VAT is charged at 0%. The sale is still a taxable supply for VAT registration purposes, and the seller can recover input VAT on costs related to zero-rated sales. Most food sold for human consumption is zero-rated, but restaurant meals, crisps, and confectionery are standard rated. Books, newspapers, and children's clothing and footwear are zero-rated.

The boundary between zero-rated and standard-rated food catches businesses out. A chocolate biscuit is standard rated. A plain biscuit may be zero-rated. HMRC publishes detailed guidance and a tariff that classifies thousands of products. If you sell physical goods near the boundary, check the classification rather than guessing.

Zero-rated vs exempt

Exempt supplies are different from zero-rated. With exempt supplies, no VAT appears on the invoice and the supplier generally cannot recover input VAT on related costs. Financial services, insurance, health services from registered professionals, and education from recognised bodies are commonly exempt. If your business makes only exempt supplies, you may not need to register for VAT even above the turnover threshold.

VAT inclusive vs exclusive pricing

Retail prices on shop shelves are usually VAT inclusive because consumers cannot reclaim VAT. Business-to-business quotes are often VAT exclusive because the buyer reclaims input VAT on their return. A plumber quoting £2,000 plus VAT to a homeowner should clarify whether the figure is net or gross. Homeowners cannot reclaim VAT, so a gross quote of £2,400 inclusive is clearer than £2,000 plus VAT.

For a VAT-registered business customer, quoting net plus VAT is standard. The customer pays £2,400 and reclaims £400 on their return, so their net cost is £2,000. The plumber accounts for £400 output VAT to HMRC. Everyone understands the split.

Worked examples at 20%

Net £500 plus 20% VAT: VAT is £100, gross is £600. Gross £600 inclusive: net is £500, VAT is £100. Net £10,000 plus VAT: VAT is £2,000, gross is £12,000. These figures scale linearly. A 20% rate means the VAT element is one-sixth of the gross price, because gross equals net plus one-fifth of net.

If you trade in the EU as well as the UK, rates differ by country. Germany charges 19% standard VAT. France charges 20%. Our EU VAT calculator covers all 27 EU member states plus Norway and Switzerland for cross-border comparisons.

VAT and business structure

Sole traders and limited companies charge the same VAT rates. The difference is how profits after VAT are taxed. A sole trader pays Income Tax and Class 4 NI on profits. A limited company pays Corporation Tax and the director pays tax on salary and dividends. VAT itself is collected and paid to HMRC regardless of structure. Choosing between sole trader and limited company affects income tax, not the VAT rate on your sales.

The sole trader vs limited company calculator compares take-home pay after tax. VAT registration is a separate decision based on turnover, not business structure.

Flat Rate Scheme

Small businesses with VAT turnover up to £150,000 can join the Flat Rate Scheme. You charge 20% to customers but pay HMRC a lower flat percentage of gross turnover depending on your sector. The scheme simplifies record keeping but may cost more or less than standard VAT accounting depending on your input VAT. Retail and consultancy have different flat rates. Crucially, you still show 20% on customer invoices under the scheme.

Common VAT mistakes

Applying 20% to the gross price instead of the net. Using the standard rate on domestic fuel. Treating zero-rated food as exempt and failing to register when turnover exceeds the threshold. Quoting net prices to consumers without clarifying that VAT will be added. Forgetting that VAT on purchases is recoverable only if you have a valid VAT invoice from a VAT-registered supplier.

• Add VAT: multiply net by 0.20 (or by the applicable rate)
• Remove VAT: divide gross by 1.20 for standard rate
• Check product classification for zero vs standard rate goods
• State clearly whether quotes are net or gross
• Keep VAT invoices for input tax recovery

VAT and other taxes

VAT is charged on the price of goods and services. It is not the same as Income Tax on your profits. A sole trader with £80,000 of VAT-inclusive turnover may be below the VAT registration threshold on taxable turnover net of VAT, but still pays Income Tax on profits. Understanding the difference between turnover, profit, and VATable supplies keeps you on the right side of both VAT and income tax rules.

For how Income Tax bands apply to your earnings after VAT is stripped out, see UK income tax bands explained for 2025. VAT affects your cash flow every quarter. Income Tax affects your annual return. Both need separate attention, and mixing the two when you budget is a common source of cash shortfalls.

Using the calculator on invoices

Before you send an invoice, run the net amount through the UK VAT calculator to confirm the VAT line and gross total. Select standard or reduced rate, choose add or remove VAT, and check the output. The 20% standard rate has been unchanged since 2011 and is the default for most business sales. When in doubt, assume 20% unless you have a specific reason to apply another rate.

HMRC publishes the official rate list on gov.uk. Rates change rarely but product classifications change more often as new products emerge. Software, digital downloads, and hybrid goods and services have their own rules. When a single supply spans multiple rates, apportionment may be required. For everyday invoices at the standard rate, the arithmetic is simple: one-fifth of net, or gross divided by six for the VAT element.

Construction businesses face a separate reverse charge for some supplies to other VAT-registered contractors, which moves the VAT accounting obligation to the customer. Domestic reverse charge rules do not change the headline 20% rate but change who reports it on the VAT return. If you work in construction, check whether the domestic reverse charge applies before you raise your first invoice as a newly registered business.

Digital services sold to consumers in other countries may require VAT registration overseas under MOSS-style rules, even when your UK turnover is below £90,000. The UK rate of 20% is only the starting point for domestic sales. Cross-border trade adds registration and rate questions that a simple domestic calculator cannot answer on its own. Always confirm the place of supply before you invoice an overseas client.