How VAT Is Calculated in the UK

When working with VAT, three terms come up constantly: net (the price before VAT), VAT (the tax itself), and gross (the total including VAT). Understanding these is essential before doing any VAT calculation.

Net + VAT = Gross. If you know any two of these, you can calculate the third.

To add VAT to a net amount, multiply by the VAT rate and add it to the original price. At the standard rate of 20%:

Net amount × 1.20 = Gross amount (including VAT)

Example: £500 × 1.20 = £600. The VAT is £100.

To remove VAT from a gross amount, divide by 1 plus the VAT rate. At 20%:

Gross amount ÷ 1.20 = Net amount (excluding VAT)

Example: £600 ÷ 1.20 = £500. The VAT is £100.

A common mistake is to simply subtract 20% of the gross amount — this gives the wrong answer. £600 × 20% = £120, which is incorrect. The right method is to divide by 1.20.

The same formula works for any VAT rate. For the reduced rate of 5%, multiply or divide by 1.05. For zero-rated items, no VAT is applied.

Example at 5%: £200 × 1.05 = £210 (VAT = £10). Removing: £210 ÷ 1.05 = £200.

When extracting VAT from a gross amount, you can use the VAT fraction. At 20%, the fraction is 1/6. So: £600 × (1/6) = £100 VAT.

At 5%, the fraction is 1/21. This shortcut is useful for mental arithmetic and quick checks.

The formulas above work well for standard-rated goods and services. However, VAT can be more complex when dealing with mixed supplies, partial exemptions, the Flat Rate Scheme, or cross-border transactions.

If your situation involves any of these, it's worth checking HMRC's detailed guidance or consulting a VAT-registered accountant. Our VAT calculator handles standard add/remove calculations at any UK rate.