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From 6 January 2024, the main rate of class 1 National Insurance contributions (NIC) deducted from employees’ wages is reduced from 12% to 10%. From 6 April 2024, the main rate of self-employed class 4 NIC will reduce from 9% to 8% and class 2 NIC will no longer be due. Those with profits below £6,725 a year can continue to pay class 2 NIC to keep their entitlement to certain state benefits. Our guidance will be updated in full in spring 2024.

Updated on 6 April 2023

Value-added tax (VAT)

Value added tax (VAT) is charged on supplies of goods and services in the UK. It is also charged on the import of goods into Great Britain from outside the UK, and on the import of goods into Northern Ireland from outside the UK and EU.

Content on this page:

Introduction

VAT is a sales tax charged by VAT-registered traders on the value of the goods or services supplied to their customers.

In a supply chain, each person, from the first supplier to the final consumer, is charged VAT on taxable supplies to them. They also charge VAT on taxable supplies that they make if they are VAT-registered. To see how VAT works in practice, have a look at the example of Johnny on our page Gig work and the flat rate VAT scheme.

In general, businesses do not suffer the tax burden of VAT, apart from having to administer it. The tax burden effectively falls on the final consumer.

Businesses that cannot set off or recover all the VAT that they pay do, however, face a cost from VAT.

VAT threshold

The law requires UK traders with sales (turnover) above the VAT threshold to register for VAT and charge it on supplies of goods or services. The trader charges the VAT and then pays it over to HM Revenue & Customs (HMRC), the government’s tax-collecting authority.

Traders whose sales are below the VAT threshold do not need to register for VAT (but can do so voluntarily) so not all traders are required to be VAT-registered.

We explain about compulsory and voluntary VAT registration on our page VAT when running a business.

VAT rates

There are three rates of VAT.

The standard rate of VAT is 20%. Certain items are charged at lower rates. For example, children’s clothing is charged at the rate of 0% whereas household fuel such as gas and electricity is charged at the reduced rate of 5%.

The rate of VAT was reduced temporarily for some businesses such as hospitality and tourism which were severely hit by the coronavirus pandemic. The temporary reduction ceased on 31 March 2022. For more information on this see GOV.UK.

Supplies of specified types are exempt from VAT – these are listed in the law.

If a business makes exempt supplies, they do not charge VAT. They can only recover VAT from their customers by adjusting their sales prices – they cannot reclaim VAT they have paid from HMRC.

Businesses that make taxable supplies (charged at 20%, 5% or 0%) can reclaim VAT that they have paid on their purchases.

More information

There is more information about registering for VAT and VAT for businesses on our page VAT when running a business.

There is more information about the processes involved in dealing with VAT on our page Reporting and paying VAT.

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