How to Calculate VAT from Gross Amount

Learn how to calculate VAT from a gross or net amount in the UK. Includes current VAT rates and step-by-step examples.

Understanding how to calculate VAT is important whether you’re a business owner, contractor, or simply reviewing an invoice. The UK has specific VAT rates, and calculating how much VAT is included in a gross amount (a price that already includes VAT) is a common task.

This guide covers how VAT works, how to calculate VAT from both gross and net amounts, the current VAT rates, and when each rate applies.

What Is VAT?

VAT (Value Added Tax) is a consumption tax charged on goods and services in the UK. It’s included in the price most consumers pay at the point of sale. VAT is collected by businesses and paid to HMRC.

Current VAT Rates in the UK (2024)

  • Standard rate: 20% – applies to most goods and services

  • Reduced rate: 5% – applies to some home energy, car seats and sanitary products

  • Zero rate: 0% – applies to most food, books, children’s clothes and public transport

The most common rate is 20%, and this is the rate used in most VAT-inclusive (gross) pricing.

Is VAT Calculated on Net or Gross?

VAT is calculated on the net amount – the price before tax. However, many invoices and receipts show only the gross amount (the total including VAT). If you want to know how much VAT is included in a gross figure, you need to work backwards.

How Do I Work Out VAT on a Price?

There are two key methods:

  1. From a net amount: Add VAT to find the gross amount

  2. From a gross amount: Extract the VAT portion

How to Calculate VAT from a Gross Amount (20% VAT Rate)

To work out the VAT included in a gross amount:

Divide the gross amount by 1.2
Then subtract the result from the gross to find the VAT.

Example:

Gross price: £120
£120 ÷ 1.2 = £100 (net)
£120 – £100 = £20 VAT

Alternatively, you can use the formula:
VAT = Gross ÷ 6

£120 ÷ 6 = £20 VAT

This shortcut works only for the standard 20% rate.

How to Calculate VAT from a Net Amount

To add VAT to a net amount:

Multiply the net amount by 1.2 for 20% VAT
Multiply by 1.05 for 5% VAT

Example:

Net price: £100
£100 × 1.2 = £120 gross
VAT = £120 – £100 = £20

For 5% VAT:
£100 × 1.05 = £105 gross
VAT = £5

Who Does the New 5% VAT Rate Apply To?

The 5% VAT rate was previously used as a temporary COVID-19 relief for hospitality, holiday accommodation and attractions. That reduced rate has now reverted to 20%.

However, the 5% VAT rate still applies to:

  • Domestic fuel and power (gas, electricity)

  • Children’s car seats

  • Some energy-saving materials in homes

Always check the latest HMRC guidance or confirm with your supplier.

What Is Zero-Rated VAT?

Zero-rated items are still VAT-taxable, but the rate is 0%. Businesses selling zero-rated goods must still:

  • Register for VAT if they exceed the VAT threshold

  • Submit VAT returns

  • Maintain VAT records

Common zero-rated items include:

  • Basic food

  • Books and newspapers

  • Children’s clothes

  • Public transport fares

Making Tax Digital for VAT

Businesses over the VAT threshold (£85,000 turnover) must use Making Tax Digital (MTD) to submit VAT returns using compatible software.

Even businesses under the threshold can sign up voluntarily to benefit from easier record-keeping and compliance.

Final Thoughts

To calculate VAT from a gross amount, divide the gross figure by 1.2 for standard-rate VAT. This will give you the net amount, and the difference is your VAT.

Whether you’re issuing invoices or reviewing receipts, knowing how to work with gross and net prices is essential for accurate record-keeping and tax compliance. Always confirm which VAT rate applies to your goods or services, especially if you operate across different sectors.