Key takeaways
- The UK standard VAT rate is 20% and applies to most goods and services unless HMRC specifically classifies them under a lower rate or as exempt.
- Reduced-rate items taxed at 5% include domestic gas and electricity, children's car seats, sanitary products and certain energy-saving home installations.
- Zero-rated goods carry 0% VAT but remain within the VAT system, so businesses selling them can still reclaim input VAT on their costs.
- VAT-exempt supplies such as financial services, insurance, education and health services fall outside the VAT system, and businesses providing only exempt supplies cannot reclaim input VAT.
- The VAT registration threshold for 2025/26 remains at £90,000 of taxable turnover in any rolling 12-month period, and the voluntary deregistration threshold is £88,000.
VAT Rates UK
VAT, or Value Added Tax, is a tax that gets charged onto the price of most goods and services in the UK. It’s applied at every step of the supply chain - from production and wholesale all the way to the final sale to the customer. Ultimately, it’s the end consumer who ends up paying the full cost of VAT, even though businesses collect it on behalf of the government.
VAT plays a crucial role in how the UK government generates revenue to support public services like healthcare, education, and infrastructure. So, when you’re out shopping for everyday items like clothes, gadgets, or even digital services, you’re likely paying VAT on those purchases. It influences the prices customers see, how businesses set their prices, and how companies handle their tax reporting.
In this guide, we’ll explore the current UK VAT rates, which goods and services fall into each VAT category, how much tax you might be paying, and what businesses need to keep in mind when applying VAT to their pricing.
What is UK VAT Rate?
VAT rates are the percentages that charged onto the price of goods and services in the UK. These rates determine how much VAT a business needs to charge and what customers end up paying on top of the base price. Different categories of goods and services are assigned various VAT rates based on how the government classifies them.
Some items are subject to the full rate, while others might have a reduced rate, no VAT at all, or may not even fall under the VAT system. Knowing which rate applies is crucial for businesses to price their products accurately and stay compliant with VAT regulations.
Current UK VAT Rates 2025/26
In the UK, we have four primary VAT categories. Each category is tailored to certain goods or services, and the rate you pay varies based on what you're purchasing. Let’s take a closer look at each one!
How much is VAT in the UK?
1. Standard Rate: 20%
This is the most common VAT rate. Most businesses charge this rate on the goods and services they sell.
Common examples include:
- Electronics, furniture, and other consumer goods
- Business consultancy and professional services
- Adult clothing and footwear
- Restaurant meals and takeaway food (excluding cold items)
If a business supplies goods or services that fall under this rate, it must add 20% VAT to its selling price and include it in VAT returns.
2. Reduced Rate: 5%
Some goods and services qualify for the reduced rate of 5%. This applies to certain goods and services where the government wants to offer lower costs to the public, often for health, safety or environmental reasons.
Examples for businesses:
- Domestic energy supply (gas and electricity)
- Children’s car seats
- Certain home insulation and energy-saving materials
- Mobility aids when installed in someone’s home (if certain conditions are met)
If your business offers any of these, you'll charge 5% VAT instead of the standard rate.
3. Zero Rate: 0%
Zero-rated goods and services are still taxable, but the VAT rate is 0%. Businesses must still record these sales and include them in their VAT returns. The benefit is that they can reclaim VAT on related costs and purchases.
Examples include:
- Most food and non-alcoholic drink items
- Children’s clothes and shoes
- Printed books and newspapers
- Passenger transport by bus, train, or air (within certain rules)
Even though these items are zero-rated, businesses selling them might still need to register for VAT if their turnover exceeds the VAT registration threshold. They must also calculate VAT, submit VAT returns and can reclaim VAT on eligible purchases.
4. Exempt and Outside the Scope
VAT exempt items are not taxed at all. They don’t have VAT added, and businesses providing them cannot reclaim VAT on related purchases. Exempt items are completely outside the VAT system.
VAT Exempt:
If your business supplies exempt goods or services, you don’t charge VAT, and you can’t reclaim VAT on related costs.
Examples include:
- Education and training
- Insurance and financial services
- Health services provided by registered professionals
- Some postal services
Outside the Scope:
These transactions are not part of the VAT system at all. You don’t charge VAT or report them on VAT returns.
Examples include:
- Paying salaries and wages
- Goods sold outside the UK
- Certain statutory fees like MOT tests
It’s useful to know the difference between zero-rated and exempt. Zero-rated items are still taxable (at 0%), allowing businesses to claim back VAT on expenses, while exempt services fall outside the VAT system entirely.
Why Knowing the Right VAT Rate Matters
Getting the VAT rate right is important for running a business in the UK. It impacts how you set your prices, the profit you make, and how you handle your VAT returns. Using the wrong rate can lead to some serious issues, both financially and legally.
Impact on Pricing and Profit Margins
When you apply the correct VAT rate, you ensure that your pricing is spot on. Charging too much VAT could scare off customers, while charging too little might mean you have to cover the difference yourself.
VAT also plays a big role in your profit margins. For instance, if your product qualifies for the reduced or zero rate, you can still reclaim VAT on your costs, which helps keep your expenses in check. Conversely, applying the standard rate unnecessarily could inflate your prices, potentially hurting your sales and profits.
Businesses that know their VAT rates well can confidently set their pricing strategies. This not only helps them stay competitive but also ensures they cover their costs and make a profit.
VAT Returns and HMRC Compliance
If you're VAT-registered, you need to submit regular VAT returns to HMRC. These returns detail how much VAT you've charged your customers and how much you've paid on your business expenses. It's essential to use the correct VAT rates for all the transactions you report.
By applying the right rate, you keep your VAT records accurate, making it easier to complete your returns and maintain your books. Plus, it cuts down on the time spent correcting errors or fixing mistakes when tax season rolls around.
Accurate VAT reporting demonstrates that your business is responsible and compliant with tax regulations. This builds trust with HMRC and helps you avoid issues in the future.
Avoiding Penalties from Incorrect VAT Treatment
Charging the wrong VAT rate can lead to penalties, interest charges, and even tax investigations. HMRC expects businesses to apply the correct rate based on the goods or services they provide.
If you overcharge VAT, you might have to refund your customers and pay back the excess amount collected.
VAT on Overseas Sales
Selling Goods Overseas
If your business sells, ships, or moves goods from the UK to another country, you usually don’t have to add VAT. Most goods sent from:
- Great Britain to locations outside the UK
- Northern Ireland to places outside both the UK and the EU
can normally be treated as zero-rated for VAT purposes. This means you don’t charge VAT, but the sale must meet the export conditions, and you must keep proof that the goods have left the UK.
Selling Services Overseas
The VAT treatment of services depends on whether your customer is a business or a consumer, and where they are based.
To Business Customers:
If your client is a business based outside the UK, you usually don’t charge UK VAT. Most services to overseas businesses are either zero-rated or outside the scope of UK VAT. In many cases, the “reverse charge” rule applies, where the buyer deals with the VAT in their own country.
To Individual Customers:
If your customer is not a business, you may still need to charge UK VAT, especially for services like digital products, telecoms, or broadcasting. Some services fall under specific rules, like the One Stop Shop (OSS) scheme in the EU.
Get Professional VAT Help
Understanding UK VAT rates is essential for both shoppers and businesses, as it empowers them to make well-informed choices. When you know which rate applies to various goods and services, it becomes much simpler to manage expenses, price items accurately, and avoid any mistakes when it comes to charging or paying VAT.
Keep in mind that VAT rules can change over time, and certain products may change categories. That’s why it’s wise to regularly check VAT rates, especially if you’re running a business or handling products or services that fall under different VAT bands.
For businesses, dealing with VAT can be a tough task. Getting the help of a qualified London accountant or VAT specialist can save you time and minimise the chances of making mistakes. They can clarify how VAT rules pertain to your industry, assist with VAT returns, and provide guidance on reclaiming VAT on expenses.
If you want to keep your VAT responsibilities in check, don’t hesitate. Reach out to a professional and take the hassle out of managing your VAT.
