How VAT Works in the UK (2026-27): Rates, Registration Threshold and Calculations
VAT (Value Added Tax) is charged by VAT-registered businesses on most taxable goods and services. In the UK the standard rate is 20%, the reduced rate is 5%, and some supplies are zero-rated at 0%. Businesses must register for VAT once taxable turnover exceeds £90,000 in any rolling 12-month period.
The three VAT rates and when they apply
UK VAT is charged at one of three rates depending on the nature of the supply — who supplies it or who receives it is generally irrelevant. Standard rate (20%): the default rate that applies to most goods and services unless a specific exemption or reduced rate applies. Examples include most professional services, electronics, clothing for adults, alcohol, and restaurant meals. Reduced rate (5%): applies to a specific list of goods and services including domestic energy (electricity and gas for home use), children's car seats, smoking cessation products (such as nicotine patches), and certain residential conversions and renovations. The 5% rate has been in force for domestic energy since 2001. Zero rate (0%): applies to another specific list including most food (but not restaurant meals or hot takeaway food), children's clothing and footwear, books, newspapers, most medicines, and passenger transport. Zero-rated supplies are still technically taxable — an important distinction explained below. Exempt from VAT: certain supplies fall entirely outside the VAT system, including most financial services, insurance, healthcare provided by regulated professionals, most education, and most residential property rentals. Exempt is not the same as zero-rated. HMRC publishes a comprehensive list of which goods and services fall into each category. If you are unsure which rate applies to a particular supply, the HMRC guidance document Rates of VAT on different goods and services is the authoritative reference.
The VAT registration threshold and when you must register
The VAT registration threshold for 2026-27 is £90,000. Once your taxable turnover — the total value of goods and services that are not exempt from VAT, including zero-rated supplies — exceeds £90,000 in any rolling 12-month period, you must register for VAT. The 12-month rolling window does not align with the tax year or a calendar year. You must check it continuously: at the end of each month, look back at the preceding 12 months of taxable turnover. If that total has exceeded £90,000, you must notify HMRC within 30 days of the end of that month. Your registration becomes effective from the first day of the second month after the one in which the threshold was crossed. There is also a forward-looking trigger: if you reasonably expect your taxable turnover to exceed £90,000 in the next 30 days alone — for example, you are about to start a large contract — you must register immediately, and the registration is effective from the date that expectation arose. The consequences of late registration are significant: HMRC can assess a penalty, and you become liable for the VAT you should have charged from the effective registration date, even if you did not charge it to customers. Voluntary registration below the threshold is also possible and can be beneficial if you have significant VAT-recoverable costs. The deregistration threshold is £88,000: if you are already registered and expect your taxable turnover in the next 12 months to fall below this figure, you may apply to cancel your registration.
How to add VAT to a price and how to extract VAT from a gross price
Adding VAT (net price to gross) is straightforward: multiply the net (excluding VAT) price by the VAT rate and add the result to the net price. For the standard rate, the gross price equals the net price multiplied by 1.20. For the reduced rate, the gross equals the net multiplied by 1.05. Extracting VAT from a gross price (gross to net) requires the VAT fraction. For the standard rate (20%), the VAT element embedded in a gross price equals the gross price divided by 6 — because VAT is one-sixth of the gross (20% of net equals 16.67% of gross, and 1/6 = 0.1667). For the reduced rate (5%), the VAT fraction is 1/21, so divide the gross by 21 to find the VAT component. Rounding rule: round the VAT amount to the nearest penny on each invoice line (0.5p rounds up). On the VAT return itself, Box 1 (output VAT due to HMRC) and Box 4 (input VAT you are reclaiming) are rounded down to the nearest whole pound; other boxes round normally. These arithmetic rules come directly from HMRC guidance. If a transaction involves supplies at multiple rates — for example a restaurant meal that includes zero-rated cold food and standard-rated hot food and drinks — each element is taxed separately at its own rate.
Zero-rated versus exempt: why the distinction matters
Both zero-rated and exempt supplies result in the customer paying no VAT — but for the business making the supply, the distinction is critical. Zero-rated supplies are taxable supplies on which the rate happens to be 0%. Because they are taxable, a business making zero-rated supplies can recover the VAT it paid on goods and services it purchased to make those supplies (its input VAT). A book publisher, for example, can reclaim the VAT paid on printing, paper, and warehousing. Exempt supplies are outside the VAT system altogether. A business making only exempt supplies cannot register for VAT and cannot reclaim any input VAT. A business making a mix of taxable and exempt supplies (a partially exempt business) can only reclaim a proportion of its input VAT — calculated through a partial exemption method. Common zero-rated supplies: food (most, not restaurant meals), children's clothing, books and newspapers, passenger transport, medicines dispensed on prescription. Common exempt supplies: financial services and insurance, residential property rental, education and vocational training, health and medical care by regulated practitioners. Getting this distinction wrong can lead to incorrectly reclaimed input VAT or missed opportunities to reclaim. If the VAT liability of a particular supply is unclear, a ruling from HMRC (a non-statutory clearance) can provide certainty, though obtaining one takes time.
The VAT Flat Rate Scheme: simplified accounting for small businesses
The Flat Rate Scheme (FRS) is a simplified VAT accounting method available to small businesses. Instead of calculating output VAT charged to customers, deducting input VAT paid on purchases, and remitting the difference to HMRC, you pay a fixed percentage of your gross (VAT-inclusive) turnover directly to HMRC. Eligibility for 2026-27 requires that your taxable turnover (excluding VAT) is no more than £150,000. Once in the scheme, you must leave if your total business income exceeds £230,000 (including VAT) in the previous 12 months. The FRS percentage varies by business sector — rates typically range from around 4% to 16.5% of gross turnover, published by HMRC. In your first year of VAT registration, a 1% discount applies to the sector rate. The financial benefit of the FRS depends on your sector rate versus your actual input VAT recovery. If you have high input VAT costs (you buy a lot of materials), the standard method may be more advantageous. If you have low input VAT costs (a pure service business, for example), the FRS may produce a lower VAT bill. You should compare both methods before deciding. One significant variation: businesses with limited costs (where the value of goods purchased, including VAT, is less than 2% of turnover or less than £1,000 per year) are designated as limited cost businesses and must use a sector rate of 16.5%, which removes much of the benefit. This guide is informational only. VAT decisions, particularly around registration, partial exemption, and scheme choices, can be complex and have significant financial consequences. Seek advice from a qualified VAT professional before acting.
FAQ
Can I register for VAT voluntarily if my turnover is below £90,000?
Yes. Voluntary registration is available to any business making taxable supplies, even below the £90,000 threshold. The main benefit is the ability to reclaim input VAT on purchases. This is most valuable if you have significant VAT-recoverable business costs, or if your customers are mostly VAT-registered businesses who can reclaim the VAT you charge them. The downside is the added administrative burden of VAT returns and potentially making your prices appear higher to non-VAT-registered or consumer customers.
What is the difference between zero-rated and exempt supplies?
Zero-rated supplies carry a 0% VAT rate — no VAT is charged to the customer, but the supplier can still reclaim the input VAT they paid on related costs. Exempt supplies fall entirely outside VAT: no VAT is charged, but the supplier also cannot reclaim input VAT on costs relating to those supplies. Practically, a business making only exempt supplies cannot register for VAT at all. Businesses with a mix of taxable and exempt supplies face partial exemption rules that limit their input VAT recovery.
How do I work out the VAT in a gross (VAT-inclusive) price?
For a standard-rated (20%) price, divide the gross price by 6. This gives the VAT element. For example, a £120 gross price contains £20 of VAT (120 divided by 6), leaving a net price of £100. For a reduced-rate (5%) price, divide the gross by 21. A £105 gross price contains £5 of VAT (105 divided by 21), leaving a net of £100. These fractions come from the relationship between VAT as a percentage of net and VAT as a fraction of gross.
What is the deregistration threshold and can I cancel my VAT registration?
You may apply to cancel (deregister from) VAT if you expect your taxable turnover in the next 12 months to fall below £88,000. The deregistration threshold is set £2,000 below the registration threshold of £90,000 to avoid businesses repeatedly crossing the registration threshold in both directions. Deregistration is not automatic — you must apply to HMRC. When you deregister, you may be required to account for VAT on the current market value of any VAT-bearing assets you hold on that date.
⚠️ Informational estimate, not tax advice. Payroll software may differ in edge cases. Verify with a professional.