Published 1 January 2025 · 7 min read

How to Calculate VAT — Adding and Removing VAT Explained

You've just gone freelance, your first proper client asks you to add VAT to your invoice, and you're sitting there wondering: do I multiply by 0.2, multiply by 1.2, or divide by something? And when someone sends you a receipt and asks for the "ex-VAT" price, do you subtract 20% or divide by 1.2? They sound like they should give the same answer, but they absolutely don't — and getting it wrong means your invoices or expense claims are off.

The UK VAT rates you need to know

The standard VAT rate is 20%, and that's what applies to most goods and services. There's also a 5% reduced rate for things like home energy bills and child car seats, and a 0% zero rate for essentials — most food, children's clothes, books, and newspapers. Zero-rated isn't the same as VAT-exempt (we'll cover that distinction in a moment, because it actually matters if you're VAT-registered).

How to add VAT to a price

This one's straightforward. Take your net price (that's the price before VAT) and multiply by 1.20.

Formula: Price including VAT = Net price × 1.20

So if you're charging £500 for a piece of work, the VAT-inclusive price is £500 × 1.20 = £600. The VAT element is £100. That's it. For the 5% reduced rate, multiply by 1.05 instead.

How to remove VAT from a price

This is where people trip up. If someone gives you a price that already includes VAT, you need to divide by 1.20 to get the net amount. Not subtract 20%. Divide by 1.20.

Formula: Price excluding VAT = Gross price ÷ 1.20

A £600 invoice including VAT? Divide by 1.20 and you get £500 net, with £100 being the VAT. Simple.

Why "just subtract 20%" is wrong (with proof)

This is the single most common VAT mistake, and it costs businesses real money. Let's walk through it with actual numbers so you can see exactly why it doesn't work.

Say you've got a VAT-inclusive price of £600. If you "subtract 20%" you get: £600 − £120 = £480. But that's wrong. The correct net price is £500 (because £500 × 1.20 = £600).

You've undershot by £20. Why? Because 20% of £600 (£120) is not the same as 20% of £500 (£100). VAT was originally calculated on the net price, not the gross. When you subtract 20% of the gross, you're taking 20% of a bigger number — a number that already has VAT baked into it.

Here's an easy way to remember it: adding VAT and removing VAT are not opposite operations in the way you'd think. Adding 20% means multiplying by 1.2. The reverse of multiplying by 1.2 is dividing by 1.2 — not subtracting 0.2. The maths is unforgiving on this one, and if you're filing VAT returns with the wrong figures, HMRC won't be impressed.

Quick reference formulas

Task	Standard rate (20%)	Reduced rate (5%)
Add VAT	Multiply by 1.20	Multiply by 1.05
Remove VAT	Divide by 1.20	Divide by 1.05
Find VAT amount	Divide by 6	Divide by 21

Zero-rated vs exempt — what's the difference?

This catches a lot of people out. Zero-rated and VAT-exempt sound similar, but they're treated differently if you're a VAT-registered business.

Zero-rated items (most food, children's clothes, books, public transport) technically have VAT on them — it's just charged at 0%. The important bit: if you sell zero-rated goods, you can still reclaim the VAT on your business expenses. You're "in the VAT system" even though you're not charging any to your customers.

Exempt items (insurance, education, health services from registered practitioners) are outside the VAT system entirely. If you only make exempt supplies, you can't register for VAT and you can't reclaim any input VAT. If you make a mix of taxable and exempt supplies, you'll need to deal with partial exemption — which, fair warning, is a headache best left to your accountant.

Worked examples for real situations

• Freelancer invoicing a client: You charge £2,000 for a project (net). VAT-inclusive invoice: £2,000 × 1.20 = £2,400. The VAT element is £400.
• Working out VAT on a receipt: You buy office supplies for £59.99 including VAT. Net price: £59.99 ÷ 1.20 = £49.99. VAT paid: £10.00. That's what goes on your VAT return as reclaimable input tax.
• Energy bill (reduced rate): Your gas bill is £84 including 5% VAT. Net: £84 ÷ 1.05 = £80.00. VAT: £4.00.
• The "divide by 6" shortcut: Need to quickly extract VAT from a gross price at 20%? Just divide by 6. A £72 business lunch? £72 ÷ 6 = £12 VAT, £60 net. This works because VAT at 20% is always exactly one-sixth of the gross price. Dead handy when you're going through receipts.

The VAT registration threshold

You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period, or if you expect to go over £90,000 in the next 30 days alone. Miss the registration deadline and HMRC can charge you the VAT you should have been collecting — out of your own pocket.

You can also register voluntarily below the threshold. This means you'll have to charge VAT on your sales, but you can reclaim VAT on your purchases. Whether that's worthwhile depends on your clients — B2B clients won't mind (they'll reclaim it anyway), but B2C customers will just see a 20% price hike. Think carefully before opting in.

Once registered, you'll need to submit quarterly VAT returns through Making Tax Digital (MTD) compatible software. Late returns and payments trigger penalties under HMRC's points-based system, so set calendar reminders for your deadlines.

The Flat Rate Scheme

If your VAT-taxable turnover is under £150,000, you might benefit from the Flat Rate Scheme. Instead of tracking VAT on every sale and purchase, you pay a fixed percentage of your gross turnover to HMRC. The percentage depends on your industry — IT consultancy is 14.5%, for instance.

You still charge your customers the full 20% VAT, but you keep the difference between what you charge and what you pay to HMRC. For businesses with low expenses, this can save both time and money. The trade-off? You generally can't reclaim VAT on purchases (except capital assets over £2,000). You have to leave the scheme if your income tops £230,000 in any 12-month period.

Common mistakes to avoid

• "Subtract 20%" to remove VAT — we've covered this, but it bears repeating. Divide by 1.2. Always. The "subtract 20%" method overestimates the VAT amount and underestimates the net price. Every single time.
• Charging VAT when you're not registered — if you're below the £90,000 threshold and haven't voluntarily registered, you can't charge VAT. Your invoices should show net prices only.
• Forgetting about the reduced rate — energy bills, child car seats, and some home renovations are at 5%, not 20%. Claiming input VAT at the wrong rate will cause problems on your return.
• Not checking if something's zero-rated or exempt — the rules are surprisingly specific. Most food is zero-rated, but a hot pasty from a bakery might be standard-rated. Chocolate biscuits are standard-rated, but plain biscuits are zero-rated. We don't make the rules.
• Missing the registration deadline — you need to register within 30 days of the end of the month when you crossed the £90,000 threshold. Not 30 days from when you crossed it. This catches people out regularly.

Tips for getting VAT right

• Use the divide-by-6 shortcut for quick mental calculations on 20% VAT.
• Keep VAT records for at least six years — HMRC can inspect that far back.
• Check whether each product or service is standard, reduced, zero-rated, or exempt before you invoice.
• If you trade internationally, different rules apply. Exports are usually zero-rated, imports may attract import VAT, and post-Brexit EU goods are handled at the border. Talk to an accountant if this applies to you.
• Set up a separate bank account for VAT — when that quarterly bill lands, you'll be glad you did.

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