The UK government raises about £800 billion in revenue each year. Most of this comes from the three biggest taxes: Income Tax, National Insurance contributions and Value Added Tax (VAT).
While not everyone in the UK pays Income Tax and National Insurance, everyone will have paid VAT. Introduced in the UK in 1940, it’s a consumption tax, meaning tax is paid on the sales of goods and services.
As with Income Tax and National Insurance contributions, how much VAT is paid can vary. In this article, we’ll go through how much VAT is charged on certain products and talk about VAT in more detail, starting with an explanation of what VAT rates are.
The amount of VAT charged on goods and services depends on what it is that’s being sold — meaning different VAT rates are set for different products.
Known as an ‘indirect tax’, VAT is levied before it reaches a customer so it’s not determined by who the customer is or their income; rather, it’s charged as a percentage of what the product is worth. However, this percentage isn’t always the same.
Read on to find out the different VAT rates in the UK and which goods and services you have to pay VAT on.
What are the VAT rates in the UK?
In January 2011, the government increased the standard rate of VAT from 17.5 per cent to 20 per cent. This means, that the VAT rates for the UK are currently:
| Rate | Per cent of VAT | What the rate applies to |
| Standard rate | 20% | Most goods and services |
| Reduced rate | 5% | Some goods and services, like certain health products and children’s car seats |
| Zero rate | 0% | Other goods and services, like most food and children’s clothes |
Which goods and services have VAT?
As you can see from the table above, most products in the UK have the standard 20 per cent VAT rate, however, some have a reduced rate of five per cent and others have no VAT at all.
Standard VAT rate
To give you some examples, VAT is charged on:
- Alcoholic drinks
- CDs, DVDs and video games
- Chocolate and sweets
- Electrical goods
- Petrol and diesel
- Postal services
- Restaurant food and drinks
- Stationary
- Takeaway food and drinks
- Taxi fares
Reduced VAT rate
Products like the following have a reduced VAT rate because they’re deemed to be essential for some consumers:
- Children’s car seats
- Maternity pads
- Mobility scooters for the elderly
Other products also have a reduced VAT rate because they’re beneficial for both the consumer and their community. Here are some examples of these:
- Energy-saving equipment
- Stop smoking aids
Zero VAT rate
Certain goods and services are VAT-exempt, in an effort to promote their use. Some examples of these are:
- Bus fares
- Train fares
- Bicycle and motorcycle helmets
Goods and services that are deemed to be essential for all consumers aren’t charged VAT either. For example:
- Construction and sale of new domestic buildings
- Household water
- Most food items
- Prescription medicine
How does VAT work?
VAT is levied at each stage of the supply chain where value is added to a product. This is why it’s called ‘Value Added Tax’. For example, when a company buys a product from a supplier, VAT will be charged on the product, and VAT will be charged again when the company sells the product to a consumer.
VAT isn’t paid by businesses; it’s designed to be paid by the consumer at the end of a sale. This means that most of a company’s VAT expenditure can be claimed back when they do their VAT return. Each year, every VAT-registered business must declare to HM Revenue & Customs (HMRC) how much VAT it has paid and charged.
Note that VAT is different to the sales tax system, whereby the tax is paid by the consumer only, at the end of the supply chain.
How much of the UK’s revenue comes from VAT?
As stated above, VAT is one of the three main contributors to the UK’s revenue. For the tax year 2020/21, Income Tax raised £196 billion, National Insurance contributions raised £144 million and VAT raised £117 billion. Together, that’s £457 billion — more than half of the UK’s total revenue.
In 2021/22, the UK’s total government revenue is forecast to be £819 billion, with almost £128 billion coming from VAT.
From 2010 to 2019, the amount of VAT raised increased, with a record high of £132 billion in 2019. However, following the COVID-19 pandemic, this figure fell to £101 billion, as spending declined. This demonstrates just how important VAT is to the UK economy and explains why it’s in the government’s best interest to encourage people to spend by reducing the VAT rate — which it did temporarily for the hospitality sector in July 2020.
How do VAT rates in the UK compare to the rest of the world?
The VAT system is used by more than 160 countries around the world and is most commonly found in the European Union. The minimum VAT rate is 15 per cent for EU countries, with Hungary’s the highest at 27 per cent, however, European countries that aren’t in the EU are able to set their own rates, with Andorra’s the lowest in Europe, at 4.5 per cent.
Here’s how the UK’s VAT rates compare to some of the other countries that use a VAT system:
| Country | VAT rate |
| Australia | Goods and Services Tax (GST): 10% |
| Belgium | Standard rate: 21%Reduced rate: 12%Reduced rate: 6%Zero rate: 0% |
| Canada | Goods and Services Tax (GST): 5% |
| China | Standard rate: 13%Reduced rate: 9%Reduced rate: 6%Zero rate: 0% |
| France | Standard rate: 20%Reduced rate: 10%Reduced rate: 5%Reduced rate: 2.1%Zero rate: 0% |
| Germany | Standard rate: 19%Reduced rate: 7%Zero rate: 0% |
| India | Goods and Services Tax (GST): 28%Standard rate: 18%Standard rate: 12%Reduced rate: 5%Zero rate: 0% |
| Ireland | Standard rate: 23%Reduced rate: 13.5%Reduced rate: 9%Reduced rate: 4.8%Zero rate: 0% |
| Italy | Standard rate: 22%Reduced rate: 10%Reduced rate: 5%Reduced rate: 4%Zero rate: 0% |
| The Netherlands | Standard rate: 21%Reduced rate: 9%Zero rate: 0% |
| Norway | Standard rate: 25%Reduced rate: 15%Reduced rate: 11.1%Reduced rate: 6%Zero rate: 0% |
| Spain | Standard rate: 21%Reduced rate: 10%Reduced rate: 4%Zero rate: 0% |
| Sweden | Standard rate: 25%Reduced rate: 12%Reduced rate: 6%Zero rate: 0% |
Summary
Most of the UK government’s annual revenue comes from Income Tax, National Insurance contributions and Value Added Tax (VAT).
VAT is a consumption tax, meaning tax is paid on the sales of goods and services, but how much VAT is paid can vary, depending on what it is that’s being sold. This means that different VAT rates are set for different products. VAT is charged as a percentage of what the product is worth. However, this percentage isn’t always the same.
The current VAT rates for the UK are as follows:
- Standard rate of 20% on most goods and services
- Reduced rate of 5% on some goods and services, like certain health products and children’s car seats
- Zero rate of 0% on other goods and services, like most food and children’s clothes
VAT is levied at each stage of the supply chain where value is added to a product. It isn’t paid by businesses; it’s designed to be paid by the consumer at the end of a sale. This means that most of a company’s VAT expenditure can be claimed back when they do their VAT return.
For the tax year 2020/21, VAT contributed £117 billion to the UK’s revenue and is forecast to raise £128 billion for 2021/22.
The VAT system is most commonly found in the European Union, where the minimum VAT rate is 15 per cent for EU countries. Hungary’s is the highest at 27 per cent, however, European countries that aren’t in the EU are able to set their own rates, meaning Andorra has the lowest VAT rate in Europe, at 4.5 per cent.