How to Calculate VAT in 2025: A Simple Guide for UK Taxpayers
We know VAT can be a bit of a head-scratcher!
Whether you’re running a business, freelancing, or just trying to make sense of what’s added to your receipts, the rules around Value Added Tax can seem more complicated than they need to be.
If you're after a stress-free way to manage it, the Pie Tax app makes it easy to keep your VAT in check. No jargon, no hidden costs.
But if you just want to get to grips with the basics first, let’s break it down step by step!
What is VAT and Who Pays It?
VAT, or Value Added Tax, is a type of sales tax added to most goods and services in the UK. It’s an indirect tax, meaning businesses collect it on behalf of HMRC when you make a purchase. So when you pay for something like a takeaway or new phone, VAT is usually baked into the price.
In the UK, consumers pay VAT, but only VAT-registered businesses handle it. If a business earns more than the VAT registration threshold of £90,000 a year (as of the 2024/25 tax year), they’re required to register for VAT. Smaller businesses can register too, especially if they want to reclaim VAT on purchases.
There are a few different VAT schemes to choose from. The Standard Rate Scheme is most common, but smaller businesses might prefer the Flat Rate Scheme, which simplifies things.
Each scheme has its pros and cons, but the goal is the same, charge VAT correctly and pay it to HMRC on time!
Current VAT Rates in the UK (2025 Update)
Let’s break down the VAT basics for 2025, because that extra charge on your receipt? It adds up fast.
There are three main VAT rates in the UK, and while they mostly stay the same, this year’s budget did bring in a few changes.
Standard Rate – 20% This is the one you’ll see most often. It applies to most goods and services, from tech and clothes to trades and takeaway. This is known as the standard rate of VAT.
Reduced Rate – 5% This covers essentials like home energy, children’s car seats, and some energy-saving materials. It’s a bit of a break on the basics.
Zero Rate – 0% Items like most food, kids’ clothes, books, and bus fares are zero-rated, so you don’t pay any VAT on them at all.
Update for 2025: One big change? Private school fees now have VAT added at 20%, thanks to a new measure from this year’s budget.
Knowing these rates helps avoid surprises!
How to Calculate VAT (Step-by-Step)
VAT might look confusing at first, but once you know the formulas, it’s actually pretty straightforward.
Whether you're working with net prices (before VAT) or gross prices (including VAT), it all comes down to a bit of simple maths.
To calculate VAT from a net price (i.e. add VAT):
Use this formula: Net price × VAT rate (e.g. 20%) = VAT amount
Then: Net price + VAT = Gross price
Example: If something costs £100 (excluding VAT), 20% of that is £20, so the total with VAT is £120.
To calculate VAT from a gross price (i.e. remove VAT):
Use this simple formula: Gross price ÷ (1 + VAT rate)
For 20% VAT, that’s: Gross ÷ 1.2 = Net
Example: £120 ÷ 1.2 = £100 net, which means £20 was VAT.
Easy when you break it down, right?
How to Add or Remove VAT from a Price
Need to add or remove VAT but not sure where to start? Don’t worry, it’s easier than it looks, especially with the standard VAT rate at 20%.
To add VAT to a net price:
Multiply the net amount by 1.2.
Example: £100 × 1.2 = £120 (that’s £100 + £20 VAT).
To remove VAT from a gross price:
Divide the gross price by 1.2.
Example: £120 ÷ 1.2 = £100, which means £20 was VAT.
Rather skip the maths? Our Pie Tax app can handle all your VAT calculations for you! No spreadsheet headaches, no second-guessing. Win win.
VAT Invoices and Records: What You Need to Know
If you’re VAT-registered, there’s no getting around it, your invoices and records have to follow HMRC’s rules. No cutting corners!
A proper VAT invoice isn’t just a nice-to-have. It’s essential. Here’s what it needs to include:
Your business name, address and VAT number
A clear invoice date and unique number
The customer’s details
A short description of what you sold
The net amount, VAT rate, VAT amount (including the VAT element), and the final total amount (gross)
The VAT tax point
On top of that, you’ve got to keep VAT records for at least 6 years. These should show all the VAT you’ve charged (output VAT) and all the VAT you’ve reclaimed (input VAT).
It sounds like a lot, but once you get into the habit, it’s pretty straightforward. And it saves a ton of stress when it’s time to submit your return or if HMRC ever comes knocking with questions!
Do You Need to Charge VAT? (Small Business Guide)
Wondering if you should be charging VAT? If your annual turnover is over £90,000, then yes, you’re legally required to register with HMRC as a VAT business.
Under that? It’s your choice. Some sole traders and freelancers register early to reclaim VAT on business expenses like software or equipment.
Voluntary registration can make your business look more professional, but it also means extra admin as you’ll need to file VAT returns and issue proper invoices.
Pros of registering early:
Reclaim VAT on business costs
Can boost credibility with clients
Cons:
More paperwork and quarterly returns
You’ll need to charge clients VAT
It all depends on your setup, some prefer the flexibility, others want the savings!
Claiming Back VAT (Input Tax Explained)
Input tax is the VAT you pay on business expenses: things like office supplies, software, or equipment. If you’re VAT-registered, you can usually claim it back, as long as the purchase is for business use only. Just make sure you’ve got a proper VAT invoice to prove it.
You claim input tax through your VAT return, which is usually submitted every quarter. It shows how much VAT you’ve charged (output tax) and how much you’ve paid (input tax). If you’ve paid more than you charged, HMRC gives you the difference. If not, you pay them.
You’ve got 1 month and 7 days after the end of your VAT period to submit the return and pay. Make sure to check out more info over on the HMRC website!
Best tip? Keep things updated as you go! It makes life much easier when the deadline rolls around.
Stay on Top of VAT Without the Stress
The Pie Tax app makes managing VAT easy: track expenses, file returns, and stay compliant, all in one place. No jargon, no hidden fees, just clear tools built for small businesses and sole traders.
Plus, you’ll get helpful tips and reminders along the way, so nothing slips through the cracks.
Take the stress out of VAT. Get started with Pie Tax today.
