How UK VAT Works: A Plain-English Guide for Freelancers and Shoppers
Everything you need to know about UK Value Added Tax. Learn how the 20% standard rate is calculated, how to extract VAT from gross prices, and when registration is mandatory.
October 21, 2026 · 5 min read · UK Money
What Is Value Added Tax?
Value Added Tax (VAT) is a consumption tax charged on most goods and services provided by registered businesses in the United Kingdom. When you buy goods as a consumer, VAT is usually already included in the displayed shelf price.
For businesses, VAT is not a direct operational cost. Registered businesses collect VAT from their customers on behalf of HM Revenue & Customs (HMRC), deduct the VAT they paid on their own commercial purchases, and send the net difference to HMRC quarterly.
The Three UK VAT Rates in 2026
Not everything in the UK is taxed at the headline 20% rate. HMRC divides all economic goods and services into three distinct categories:
| Tax Rate | Percentage | Common Everyday Examples |
|---|---|---|
| Standard Rate | 20% | Electronics, alcohol, taxi rides, professional services, adult clothing |
| Reduced Rate | 5% | Domestic residential gas and electricity, child car seats, mobility aids |
| Zero Rate | 0% | Most supermarket food, children’s clothing & footwear, books, newspapers |
How to Remove 20% VAT (The 1/6th Rule)
A frequent mistake made by new freelancers is taking 20% off a gross invoice to find the net price. If a product costs £120 including VAT, subtracting 20% (£24) leaves £96. That is wrong.
Because the 20% tax was added to the original net amount, the VAT portion is exactly one-sixth (16.67%) of the gross price. £120 divided by 6 is £20. The net price is £100, and the VAT is £20.
Shortcut: To find the net price from a gross total, divide by 1.20. To find the VAT amount alone, divide the gross total by 6.
When Must a UK Business Register for VAT?
You must register your business for VAT if your taxable turnover exceeds the statutory registration threshold (£90,000 for the 2024/2026 tax periods) over any rolling 12-month period, or if you expect your turnover to exceed that threshold in the next 30 days alone.
Voluntary registration is also permitted if your turnover is below £90,000. This is popular with business-to-business (B2B) service providers because it allows them to reclaim VAT paid on equipment, software, and stock.
Frequently asked questions
Is VAT charged on services sold to international clients outside the UK?
Generally, under the "place of supply" rules, business-to-business services supplied to overseas clients are outside the scope of UK VAT.
What is the difference between zero-rated and VAT-exempt?
Zero-rated goods are still taxable supplies (at 0%), allowing businesses to reclaim VAT on their costs. VAT-exempt supplies (such as financial or postal services) do not allow input VAT to be reclaimed.
Related calculator: VAT Calculator