VAT rate in the UK: What each tier means for your business

Value added tax (VAT) is a consumption tax applied to most goods and services sold in the UK, currently set at a standard rate of 20%. It's collected at every stage of the supply chain, with each business charging the tax on its sales.

The UK uses a tiered system with reduced, zero-rated, and fully exempt categories that determine how much tax you charge and how much you can reclaim.

What is VAT?

Value added tax is an indirect tax on consumption. Unlike income tax, which you pay on what you earn, VAT is built into the price of what you buy. Businesses collect it on behalf of HM Revenue and Customs (HMRC) and remit it through regular VAT returns.

The "value added" part describes how the tax applies at each stage of production and distribution. A manufacturer pays VAT on raw materials, then charges VAT when selling to a wholesaler. The wholesaler charges VAT again when selling to a retailer. Each business in the chain only owes HMRC the difference between the VAT it charged on sales (output tax) and the VAT it paid on purchases (input tax).

For the end consumer, VAT is part of the purchase price. For your business, it's a tax you collect, track, and file on a regular schedule. If you charge VAT you shouldn't have, you still have to account for it to HMRC, and errors on returns can lead to penalties.

What are the current UK VAT rates?

The UK applies four VAT treatments to goods and services, and the distinctions between categories can be narrow.

Standard rate (20%)

The 20% standard rate covers the majority of goods and services in the UK. Household appliances, professional services, and most software subscriptions are common examples. If a product or service doesn't qualify for a lower rate or an exemption, the standard rate applies by default.

Most businesses charge and pay this rate on the majority of their transactions, from office supplies to consulting fees and other business expenses.

Reduced rate (5%)

A smaller set of goods and services qualifies for the 5% reduced rate. The most common examples are domestic gas and electricity, children's car seats, and mobility aids for older people.

The reduced rate exists to lower the cost of items the government considers essential for health, safety, or sustainability. If you sell any of these, you charge 5% instead of 20% and track those transactions separately in your bookkeeping records.

Zero rate (0%)

Zero-rated goods carry a 0% VAT charge. You don't add any tax to the price, but you still record the sales on your VAT return. That distinction matters because you can still reclaim VAT on the costs you incur to produce or deliver those goods.

Common zero-rated items include most unprocessed food, children's clothing and shoes, books and newspapers, and passenger transport in vehicles carrying ten or more people. If your business sells primarily zero-rated goods, your VAT return will often show a refund from HMRC, since you're paying input tax on supplies without collecting output tax.

Installations of qualifying energy-saving materials in residential property, including insulation, heat pumps, solar panels, and battery storage, are currently zero-rated rather than reduced-rated. This is a temporary relief that runs until 31 March 2027, after which these installations revert to the 5% reduced rate.

VAT-exempt goods and services

Exempt items sit outside the VAT system entirely. You don't charge VAT on them, and you can't reclaim the VAT you paid on related purchases.

The most common exempt categories include insurance, financial services, education, and healthcare. Certain property transactions also carry exempt status. If your business sells a mix of exempt and taxable goods, you'll need to use a partial exemption method to calculate how much input tax you can recover. HMRC's VAT rate guidance covers the details for each category.

Quick reference

How does VAT work for your business?

The rates and timing determine what you owe HMRC each quarter.

Who charges and who pays

If you're VAT-registered, you charge VAT on your taxable sales (output tax) and pay VAT on your business purchases (input tax). The amount you owe HMRC each quarter is the difference between the two.

When your output tax exceeds your input tax, you pay the gap to HMRC, and when input tax exceeds output tax, HMRC refunds the difference.

How to calculate VAT

To add standard-rate VAT to a net price, multiply by 1.2. A product that costs £100 before tax becomes £120 including VAT. For the reduced rate, multiply by 1.05.

To extract the VAT from a gross price, divide by 6 for the standard rate. A £120 purchase includes £20 of VAT (£120 / 6 = £20). For the reduced rate, divide the gross price by 21 to find the VAT amount. Building these into your invoicing workflow saves time at quarter-end when you reconcile invoices and code expenses.

When do you need to register for VAT?

You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period. HMRC also requires registration if you expect to exceed £90,000 in the next 30 days alone. The £90,000 threshold counts standard-rated, reduced-rated, and zero-rated sales, but not exempt income.

Once you cross the threshold, you have 30 days from the end of that month to notify HMRC, and your registration takes effect from the first day of the second month after you went over.

Late registration means you owe VAT on sales made from the date you should have been registered, even if you weren't registered at the time. The VAT registration guide walks through the full process, from the Government Gateway application to Making Tax Digital requirements.

You can also register voluntarily below the threshold. This makes sense when most of your customers are VAT-registered businesses. They can reclaim the VAT you charge, so it doesn't increase their costs, and your registration lets you reclaim input tax on your own purchases.

How UK VAT rates have changed

The UK introduced VAT in 1973 at a standard rate of 10%, replacing the old purchase tax system. Since then, the rate has moved several times, and almost always upward.

It rose to 15% in 1979, climbed to 17.5% in 1991, and reached its current 20% in January 2011. VAT was first applied to domestic fuel in 1994 at 8%, then cut to the current 5% reduced rate in 1997, and has gradually been extended to cover additional essentials. During the COVID-19 pandemic, the government temporarily cut the hospitality and tourism VAT rate to 5%, then increased it to 12.5%, before restoring the full 20% rate in April 2022.

No changes to the standard 20% rate are currently scheduled. Building flexibility into your accounting systems makes future rate changes straightforward to apply.

Keep your VAT records audit-ready with Ramp, now in the UK

Every purchase your business makes carries VAT you'll want recorded correctly, and that work means collecting receipts, matching them to transactions, and coding each one to the right treatment before it reaches your accounting system.

Ramp now provides teams with a UK corporate card that captures receipts and invoices at the point of spend, suggests VAT coding for review, and syncs the results to Xero or QuickBooks Online. Your records stay current between filings rather than getting rebuilt each quarter.

Ramp is currently in beta for UK-headquartered businesses.

Sign up for early access for Ramp in the United Kingdom and learn more about our accounting automation software for UK businesses.