UK VAT rates explained
The UK charges VAT at three rates, and some things escape it entirely. Knowing which rate applies to what decides how you price, what you can reclaim and whether you need to register at all. This guide covers the rates with concrete examples, the zero-rated versus exempt distinction that catches so many people out, and the current thresholds.
The three rates
| Rate | Applies to | Examples |
|---|---|---|
| Standard, 20% | Most goods and services | Consultancy, electronics, adult clothing, restaurant meals, most tradespeople's work |
| Reduced, 5% | A defined list of goods and services | Domestic gas and electricity, children's car seats, mobility aids for older people |
| Zero, 0% | Goods and services taxed at 0% | Most food (not catering, hot takeaway, alcohol or confectionery), books and newspapers, children's clothes and shoes |
To find the VAT inside a gross price: divide by 6 for standard rate (a £120 bill contains £20 of VAT) and by 21 for the reduced rate (a £105 energy bill contains £5).
Zero-rated is not exempt
Both add nothing to the price, but they behave very differently in the VAT system:
- Zero-rated sales are taxable supplies at 0%. They count towards the registration threshold, they go in box 6 of the VAT return, and a business making them can still reclaim the VAT on its purchases. A bookshop can reclaim VAT on its rent and shopfitting even though its books carry no VAT.
- Exempt sales, such as insurance, most financial services, education by eligible bodies and health services by registered professionals, are outside the reclaim system. A business making only exempt supplies cannot register for VAT and cannot reclaim input VAT. Mixed businesses face partial exemption rules.
Some things are outside the scope of VAT entirely: wages, dividends, and charges imposed by statute.
Registration thresholds
You must register when your VAT-taxable turnover for the previous 12 months exceeds £90,000, or when you expect it to in the next 30 days. Taxable turnover includes zero-rated sales but not exempt ones. You can apply to deregister below £88,000. Both figures have applied since 1 April 2024. Voluntary registration below the threshold can make sense if your customers are VAT-registered businesses and you want to reclaim input VAT.
The rolling 12-month test, worked
The threshold is tested on a rolling 12-month total, checked at the end of every month, not on your accounting year or the calendar year. That catches out steadily growing businesses. Suppose a caterer turns over £7,000 a month through most of the year, £84,000 annualised, and then a strong festive season brings £10,500 in each of November, December and January. At the end of January the trailing 12 months total £94,500: the threshold was crossed, even though no single month looked unusual and last year's accounts showed £84,000.
Once a month-end check shows the trailing total above £90,000, the clock runs: you must register within 30 days of the end of the month you crossed, and registration takes effect from the first day of the second month after. Our caterer, crossing during January, must register within 30 days of the end of January and is registered with effect from 1 March, VAT due on every sale from that day. Waiting for the accountant to notice at year end does not help; HMRC can register you retrospectively and expect the VAT you never charged. The practical defence is a running 12-month turnover figure in your bookkeeping, glanced at monthly, which is exactly the kind of total a categorised transaction list makes trivial.
MTD for VAT
Every VAT-registered business, whatever its turnover, has been required since April 2022 to keep digital records and file VAT returns through Making Tax Digital software. The return itself is nine boxes; our VAT calculator guide explains each one.
The Flat Rate Scheme in brief
Businesses with VAT turnover of £150,000 or less can join the Flat Rate Scheme: charge VAT normally, but pay HMRC a fixed sector percentage of gross turnover and give up reclaiming input VAT (except certain capital assets over £2,000). Limited cost businesses, spending under 2% of turnover (or under £1,000 a year) on goods, must use 16.5%, which removes most of the benefit. There is a 1% discount in the first year of VAT registration.
Common mistakes
- Assuming every purchase includes 20% VAT. Train tickets (zero-rated), insurance (exempt) and unregistered suppliers all yield nothing to reclaim.
- Reclaiming without a VAT invoice or receipt showing the supplier's VAT number.
- Missing the registration threshold because zero-rated sales were not counted towards turnover.
- Treating exempt income as zero-rated and over-reclaiming input VAT.
The VAT calculator estimates the VAT position from a bank statement and arranges it in the nine return boxes; treat its output as a cross-check against your VAT account, not as a return.
Sources (last reviewed 3 July 2026):