How to Remove VAT From a Price

To remove VAT from a gross price, divide the gross by one plus the VAT rate. At a 20 percent rate, divide by 1.20. The result is the net price, and the VAT is the difference between the two. So a gross price of 120 at 20 percent contains a net of 100 (120 divided by 1.20) and VAT of 20. The common mistake is to subtract the rate directly, which gives the wrong answer.

This calculation comes up constantly: a client gives you a total that includes VAT and you need to know the price before tax, or you advertise a VAT-inclusive price and need the net for your records. The arithmetic is simple once you see why subtracting the percentage does not work.

Why you cannot just subtract the rate

The instinct is to take 20 percent off a gross price to find the net. That is wrong, and it is worth understanding why, because the error is everywhere.

VAT was added to the net, not to the gross. So the 20 percent was calculated on the smaller net figure, not the larger gross figure. Taking 20 percent off the gross removes too much, because 20 percent of the gross is more than 20 percent of the net.

Take a gross of 120 at 20 percent. Subtract 20 percent of 120 (which is 24) and you get 96, which is wrong. The correct net is 100. The 24 you subtracted is 20 percent of the wrong number. This small confusion causes real errors in pricing and bookkeeping, so the division method is the one to trust.

The correct formula

To find the net, divide the gross by one plus the rate expressed as a decimal. For 20 percent, that divisor is 1.20. For 19 percent, it is 1.19. For 5 percent, it is 1.05.

Net equals gross divided by (1 plus rate). Then VAT equals gross minus net.

Worked examples make it concrete. A gross of 240 at 20 percent: net is 240 divided by 1.20, which is 200, so the VAT is 40. A gross of 119 at 19 percent: net is 119 divided by 1.19, which is 100, so the VAT is 19. A gross of 105 at 5 percent: net is 105 divided by 1.05, which is 100, so the VAT is 5. The pattern holds for any rate.

The VAT calculator does this instantly. Enter the gross amount and the rate, and it returns the net and the VAT, so you do not have to keep the divisor straight in your head. It also works the other way, adding VAT to a net price, which is covered in how to add VAT to an invoice.

When you need to remove VAT

This calculation has a few common uses, and knowing which situation you are in keeps your records clean.

The first is working from a VAT-inclusive price a client quoted you. If a client says "the budget is 6,000 including VAT," you need the net to know what you are actually earning before tax. At 20 percent, that is 5,000 net with 1,000 of VAT.

The second is bookkeeping. Your accounts usually record income net of VAT, with the VAT tracked separately as money you owe the tax authority. When a payment lands as a gross figure, you split it into net and VAT to record it correctly.

The third is pricing decisions. If you advertise inclusive prices to consumers but think about your earnings in net terms, you constantly convert between the two. Getting the direction right keeps you from accidentally underpricing.

Remember the VAT is not yours

A useful habit when you remove VAT from a payment: the VAT portion is not your income. It is money you are collecting on behalf of the tax authority and will have to pass on. Mentally and ideally practically separating it stops the unpleasant surprise of a VAT bill arriving against money you have already spent.

This connects to how you think about your rates more broadly. The figure that matters for your livelihood is the net, after VAT and before income tax, and pricing from that number keeps you honest with yourself. The wider question of setting rates that actually cover what you need is in the freelance rate calculator guide.

Check whether VAT applies at all

One caveat worth stating. This whole calculation assumes the price genuinely includes VAT, which only happens when the seller is VAT registered. If you are not VAT registered, your prices do not contain VAT to remove, and you should not be treating any part of a payment as VAT. Whether you need to register and charge VAT at all depends on your country and turnover, and that is covered in do I need to charge VAT as a freelancer.

When you do issue invoices, showing the net, VAT, and gross clearly is straightforward with the free invoice generator, which runs in your browser with no signup and nothing stored on a server. Divide by one plus the rate, keep the VAT separate, and the numbers always reconcile.

Common questions

How do I work out the VAT included in a price?

Divide the gross price by one plus the rate to find the net, then subtract the net from the gross to find the VAT. At 20 percent, divide by 1.20: a gross of 120 gives a net of 100 and VAT of 20. At 19 percent, divide by 1.19. The VAT is always the difference between the gross and the net, never a flat percentage taken off the gross.

Why is subtracting 20 percent from the gross wrong?

Because the VAT was added to the net, the smaller figure, not to the gross. So 20 percent of the gross is more than the VAT that was actually added. Take a gross of 120: subtracting 20 percent of 120 removes 24 and leaves 96, but the correct net is 100 and the VAT is 20. The percentage was calculated on 100, not on 120, which is exactly why you divide rather than subtract.

Is the VAT portion of a payment my income?

No. When you remove VAT from a payment you receive, the VAT portion is money you collected on behalf of the tax authority and will have to pass on. It is not yours to keep. Separating it, mentally and ideally in practice, avoids the unpleasant surprise of a VAT bill landing against money you have already spent. The figure that matters for your livelihood is the net, before income tax.

If I am not VAT registered, does my price include VAT?

No. Only a VAT-registered seller charges VAT, so if you are not registered, your prices contain no VAT to remove, and you should not treat any part of a payment as VAT. The whole calculation in this article assumes the price genuinely includes VAT, which only happens once you are registered. If you are unsure whether you need to register and charge VAT in the first place, that is a separate question that depends on your country and your turnover, and it is worth settling before you start splitting payments into net and tax.

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Related articles

• How to Add VAT to an Invoice
• Do I Need to Charge VAT as a Freelancer?
• The Freelance Rate Calculator Guide