VAT has a reputation for being complicated. It isn't. The arithmetic takes about five seconds once you know what you're looking for — the problem is that most explanations spend three paragraphs on context before getting to the actual number.
There are two situations you'll run into. Either you have a net price (before VAT) and need to know how to add VAT to a price before sending an invoice. Or you have a figure that already includes VAT and need to work backwards to find the original amount, the VAT component, or both.
This guide covers both calculations, with real numbers at each step. It also covers the different UK VAT rates, when you're legally required to register, and what keeping track of it actually looks like once you are.
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How to add VAT to a price
The formula is one step. Take your net price (the amount before VAT) and multiply by 1 plus the VAT rate. For the standard UK rate of 20%, that's:
£350 × 1.20 = £420 total (inc. VAT)
VAT amount: £420 − £350 = £70
The 1.20 comes from adding 1 (representing 100% of the original price) to 0.20 (the 20% VAT rate). For a different rate the logic is identical: 5% VAT becomes 1.05, 0% VAT becomes 1.00.
One important thing to keep in mind: the VAT element — that extra £70 in the example above — isn't yours to keep. It passes through your books and gets paid over to HMRC when you file your VAT return. Your actual income from the job is still £350.
When you send an invoice, you need to show both figures separately: the net amount (£350), the VAT rate (20%), the VAT amount (£70), and the gross total (£420). Any VAT-registered business receiving your invoice will need those numbers to reclaim their own VAT.
How to remove VAT from a price that already includes it
This is sometimes called "backing out" VAT or a reverse VAT calculation. You'll need it when a receipt or supplier invoice shows a VAT-inclusive total and you need to split out the components — for example, to record the net cost in your accounts or to check how much VAT you can reclaim.
£480 ÷ 1.20 = £400 net price
VAT amount: £480 − £400 = £80
There's also a useful shortcut for finding the VAT amount directly, without working out the net price first. Because 20 ÷ 120 simplifies to 1 ÷ 6, you can divide the gross price by 6 to get the VAT amount in one step:
£480 ÷ 6 = £80 VAT. Same answer, fewer steps.
This shortcut only works for the standard 20% rate. For 5% VAT, divide by 1.05 to get the net price, then subtract — there's no clean fraction equivalent.
UK VAT rates at a glance
Not everything is taxed at 20%. The UK has three active VAT rates and a fourth category — exempt — that works differently from the rest.
The distinction between zero-rated and exempt matters if you're reclaiming VAT on purchases. Zero-rated supplies still count as VAT-taxable sales — you can reclaim the input VAT on any related business costs. Exempt supplies are outside the VAT system entirely, and you generally can't reclaim the VAT on costs attached to those sales. If your business makes a mix of both, the rules get more complicated and it's worth getting specific advice from an accountant.
When do you need to register for VAT?
In the UK, VAT registration becomes legally required when your VAT-taxable turnover crosses £90,000 in any rolling 12-month period (the threshold for 2024/25 — check HMRC directly for the current figure, as it adjusts from time to time). Once you hit that number, you have 30 days to register.
After registration, you charge VAT on all standard and reduced-rate sales, file a VAT return (usually quarterly), and can reclaim the VAT on your own business purchases.
You can also register voluntarily before hitting the threshold. This makes sense if most of your clients are VAT-registered businesses — they'll reclaim the VAT you charge anyway, so it's cost-neutral for them, and you get to reclaim the VAT on your own costs in return. It's less useful if most of your customers are individuals who can't reclaim anything, since adding 20% to your prices makes you more expensive overnight.
Keeping track of VAT once you're registered
Once you're VAT registered, every invoice you issue needs to show your VAT registration number, the net amount, the VAT rate, the VAT amount, and the gross total as separate line items. Every quarter, you submit a VAT return to HMRC — the total VAT you collected minus the VAT you can reclaim on business costs — and pay (or receive) the difference.
In a spreadsheet, this is manageable when you have a handful of clients. Once volume picks up, dedicated accounting software makes a real difference. Tools like FreshBooks and Xero calculate the VAT split on each invoice automatically, track what you owe in real time, and generate your VAT return in Making Tax Digital (MTD) format — which is now required for most VAT-registered businesses filing digitally.
Frequently asked questions
What's the formula for adding 20% VAT to a price?
Multiply the net price by 1.20. A service costing £100 before VAT becomes £100 × 1.20 = £120 including VAT. The extra £20 is the VAT amount — it belongs to HMRC, not to you. For other rates: multiply by 1.05 for 5%, or 1.00 for zero-rated (the price stays the same).
How do I remove VAT from a price that already includes it?
Divide the gross (VAT-inclusive) price by 1.20 to get the net price, then subtract to find the VAT. For a £120 total: £120 ÷ 1.20 = £100 net, so the VAT is £20. Shortcut for 20% only: divide the gross price by 6 to get the VAT amount directly (£120 ÷ 6 = £20).
When do I need to register for VAT in the UK?
When your VAT-taxable turnover exceeds £90,000 in any rolling 12-month period (the 2024/25 threshold — check HMRC for updates). You then have 30 days to register. You can also register voluntarily before hitting that number, which is worth considering if most of your clients are other VAT-registered businesses.
What's the difference between zero-rated and VAT-exempt?
Both result in no VAT being charged to the customer, but they work differently. Zero-rated supplies still count as VAT-taxable sales, so you can reclaim the VAT on related business costs. Exempt supplies fall outside the VAT system entirely — no VAT is charged, and you generally can't reclaim VAT on costs tied to those sales either.
Can I reclaim VAT on my business purchases?
Yes, if you're VAT registered. You can reclaim the VAT paid on goods and services used for your business — software subscriptions, equipment, professional services, and so on. It's claimed through your quarterly VAT return, reducing the amount you owe HMRC (or increasing any repayment owed to you).