How Is VAT Calculated
VAT is calculated as a percentage of the net price. In the UK the standard rate is 20%, so a net price of £100 carries £20 of VAT and a gross price of £120. The formula is simple: VAT equals net price multiplied by the rate, and the gross price equals net price plus VAT.
Going the other way, from a gross price to the VAT inside it, needs a different formula, because the VAT is a percentage of the net price, not of the gross price. Divide the gross price by 1 plus the rate as a decimal to get the net price, then subtract. For £120 at 20%, the net price is £100 and the VAT is £20, not £24.
Reduced rates complicate things. Some goods and services use 5% or 0%, and the rate depends on the item, not on the seller. If you are unsure which rate applies, check the official guidance for that category rather than guessing, because applying the wrong rate affects both your price and your VAT return.
- VAT = net price × rate; gross = net + VAT.
- From gross: net = gross ÷ (1 + rate); VAT = gross − net.
- The rate depends on the item; 5% and 0% rates exist.
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