How to Calculate VAT: Adding, Removing, and the Mistake Everyone Makes
VAT trips people up for one reason: removing VAT is not the same as subtracting the VAT percentage. If something costs £120 including 20% VAT, the original price is not £120 minus 20%. That mistake costs businesses money on every invoice they get wrong. This guide shows you how to add VAT, how to remove it correctly, and the handful of rules that actually matter for freelancers and small businesses.
To run the numbers instantly, use the VAT Calculator. The sections below walk through the math itself, so you can check any figure by hand.
The two formulas
There are only two operations, and they are not symmetric. This is the whole thing:
Adding VAT multiplies. Removing VAT divides. The reason removing is not just "subtract 20%" is that the VAT was calculated on the smaller net figure, not on the larger gross figure, so the percentages do not line up. More on that in the common-mistakes section, because it is the single most important point on this page.
The UK rates
| Rate | Percentage | Applies to |
|---|---|---|
| Standard | 20% | Most goods and services |
| Reduced | 5% | Home energy, children's car seats, some health products |
| Zero | 0% | Most food, books, children's clothing, newspapers |
The UK standard rate has been 20% since January 2011. Most professional services (design, IT, copywriting, consulting) are standard-rated at 20%. Note that "zero-rated" and "exempt" are not the same thing in VAT law, even though both mean no VAT is charged; the difference matters for whether a business can reclaim its own input VAT, which is beyond the scope of this guide.
Adding VAT: a worked example
VAT amount: £500 × 20% = £100
Gross (what you invoice): £500 × 1.20 = £600
You keep £500, and the £100 VAT is collected on behalf of HMRC. The client, if VAT-registered, can usually reclaim that £100, which is why B2B prices are normally quoted net (excluding VAT).
Removing VAT: the one people get wrong
Correct: £600 ÷ 1.20 = £500 net, so the VAT was £100.
Wrong: £600 minus 20% = £480. This is incorrect.
Why the second one fails: the 20% VAT was added to £500, not to £600. Subtracting 20% of the larger number removes too much. Always divide by 1.20, never multiply by 0.80.
A useful shortcut for the standard rate: the VAT portion of a gross price is gross × 1/6. So £600 × 1/6 = £100 VAT. That works only at 20%, but it is handy for quick checks.
The reduced rate works the same way
For the 5% reduced rate, just swap the multiplier. To add 5% VAT, multiply by 1.05. To remove it, divide by 1.05. A £210 gross figure at 5% VAT is £210 ÷ 1.05 = £200 net, with £10 of VAT. The method never changes, only the number you multiply or divide by.
How to interpret your result
The calculator shows you three numbers: net, VAT, and gross. Which one you care about depends on who you are talking to. When you quote a business client, lead with the net figure, because they reclaim the VAT and think in net terms. When you price something for consumers, the gross figure is what matters, since that is what they actually pay and UK price-marking rules require consumer prices to be shown gross. Getting this right avoids the awkward situation of quoting a number that turns out to be 20% higher or lower than the client expected.
VAT registration: when it becomes your problem
You must register for UK VAT once your taxable turnover passes £90,000 in any rolling 12-month period, and you have 30 days from crossing it to register. Below that you can register voluntarily, which is often worth it if your clients are mainly VAT-registered businesses, because you can then reclaim VAT on your own purchases while your clients simply reclaim the VAT you charge them. If your customers are consumers, voluntary registration usually just makes you 20% more expensive, so most small consumer-facing businesses stay unregistered until they have to.
Selling internationally
VAT is mainly a UK and EU concept, though many other countries run similar systems, sometimes called GST. Standard rates across Europe typically sit between 19% and 25%; Germany is 19%, France is 20%. If you sell to EU consumers from the UK after Brexit, you may need to handle VAT in the destination country, often through the EU One Stop Shop (OSS) scheme. Exports of goods are generally zero-rated. The rules here get complicated quickly, so this is one area where a quick conversation with an accountant pays for itself.
Common mistakes
- Subtracting the percentage to remove VAT. The big one. £600 minus 20% is not the net price. Divide by 1.20.
- Quoting gross to a business client. They think in net. Quote net and add VAT, or you look 20% more expensive than you are.
- Forgetting the rolling 12-month window. The £90,000 threshold is not per tax year; it is any 12 consecutive months.
- Mixing up zero-rated and exempt. They look the same to a customer but behave differently for reclaiming input VAT.
- Rounding errors on multi-line invoices. Rounding per line is allowed, but the VAT total has to match the sum of the lines exactly.
Frequently asked questions
How do I add 20% VAT to a price?
Multiply the net price by 1.20. A £500 net price becomes £500 × 1.20 = £600 gross, of which £100 is VAT.
How do I remove VAT from a gross price?
Divide the gross price by 1.20 (for 20% VAT). £600 ÷ 1.20 = £500 net. Do not subtract 20%, which gives the wrong answer.
What is the quick way to find just the VAT in a gross price?
At the 20% standard rate, multiply the gross by 1/6. £600 × 1/6 = £100 VAT. This shortcut only works at 20%.
When do I have to register for VAT?
When your taxable turnover exceeds £90,000 in any rolling 12-month period. You then have 30 days to register. You can also register voluntarily below that threshold.
Do I charge VAT to customers in other countries?
It depends. Exports of goods are usually zero-rated, and sales to EU consumers may need destination-country VAT through the OSS scheme. The rules vary, so check the specific case or ask an accountant.
What is the difference between the reduced and zero rates?
The reduced rate is 5% (home energy, children's car seats). The zero rate is 0% (most food, books, children's clothing). Both are real VAT rates, unlike "exempt," which sits outside the VAT system.
VAT is one piece of pricing correctly. If you are a freelancer or seller, it is worth seeing how VAT fits alongside your other costs and taxes, so check your overall position with the net income calculator and, if you sell on marketplaces, the Etsy fees guide for how platform fees stack on top.