VAT remains a key part of the UK tax system, with important VAT changes in 2025 that businesses must understand. Updates include changes to VAT rates, adjustments to the registration threshold and full enforcement of Making Tax Digital (MTD).
These changes affect businesses of all sizes, making it essential to stay compliant, avoid penalties and manage VAT accounting effectively.
This blog reviews the major 2025 VAT updates, HMRC’s new penalty system and practical advice for UK VAT compliance.
Key takeaways
- UK VAT rates for 2025-26: 20% standard, 5% reduced and zero-rated supplies unchanged.
- The VAT registration threshold stays at £90,000 until at least March 2026. Businesses must register once their taxable turnover exceeds this amount.
- Businesses must keep digital records and use MTD-compatible software for VAT submissions.
- From January 2025, VAT applies to private school fees, affecting parents, schools and educational providers.
- HMRC now uses a points-based penalty system for late VAT returns and payments, with penalties increasing for repeated delays.
- Registration limits and digital rules may change after 2025, so keeping up with requirements is important.
Current UK VAT Rates for 2025-26
The UK operates three main VAT rates and these have remained stable for the 2025-26 tax year. Knowing the current VAT rates in the UK is essential for pricing, invoicing and VAT filing. While debate continues about potential future change, the VAT rate in the UK is unchanged for 2025.
Standard Rate: 20%
The standard VAT rate in the UK of 20% applies to most goods and services including:
- Electronics and household appliances
- Clothing and footwear (except children’s items)
- Professional services such as legal and accounting work
- Hot takeaway food and restaurant meals
- Alcoholic drinks and confectionery
- Furniture and home furnishings
- Entertainment and leisure services
If you’re unsure whether your product or service falls into a special category, it probably charges the standard 20% VAT rate in the UK.
Reduced Rate: 5%
A reduced 5% VAT rate in the UK applies to specific items that the government considers essential or wishes to support. These include:
- Domestic fuel and power for heating and lighting homes
- Children’s car seats
- Certain energy-saving materials and installations
- Mobility aids for elderly people
- Some renovations and alterations to residential properties
The reduced rate is quite limited in scope, so most businesses won’t regularly deal with 5% VAT unless they operate in these specific sectors.
Zero Rate: 0%
Zero-rated supplies remain part of the VAT system, so they must be reported on VAT returns even though the UK VAT rate applied is 0%. This matters because if you sell zero-rated goods, you can still reclaim VAT on your business expenses. Zero-rated items include:
- Most basic food items (bread, milk, vegetables, meat)
- Books, newspapers and magazines
- Children’s clothing and footwear
- Prescription medicines and medical equipment
- Public transport
The distinction between zero-rated and exempt is important. With zero-rated supplies, you’re still in the VAT system and can reclaim input VAT. With exempt supplies, you cannot reclaim VAT on related costs.
VAT Registration Threshold in 2025
The VAT registration threshold in the UK determines when you must register for VAT with HMRC. According to HMRC regulations, the VAT registration limit in the UK remains at £90,000 of taxable turnover in any rolling 12-month period, making this the key VAT turnover threshold to monitor.
This threshold applies across business forms whether the business is a limited company, sole trader or partnership.
When is the registration required?
You must register for VAT if either:
- Your taxable turnover for the previous 12 months exceeds £90,000
- You expect your taxable turnover to exceed £90,000 in the next 30 days alone
The moment you cross this UK VAT registration threshold, you have 30 days from the end of that month to register for VAT. These rules apply equally to queries such as what is the VAT threshold for a limited company, what is the VAT threshold for a sole trader and what is the VAT threshold for small businesses.
Calculating your Taxable Turnover
Taxable turnover includes all standard-rated, reduced-rated and zero-rated sales. It does not include:
- Exempt sales (like insurance or education services before January 2025)
- Sales of capital assets (equipment you’re selling that you used in your business)
- VAT itself
You should monitor your taxable turnover monthly, applying a rolling 12-month basis rather than a standard tax year. This means checking your figures regularly, ideally monthly.
Voluntary Registration
Even if your turnover is below £90,000, you can choose to register voluntarily. This might benefit you if:
- You’re reclaiming more VAT on expenses than you’re charging customers
- Your customers are VAT-registered and won’t mind paying VAT
- You want to appear more established to potential clients
Deregistration Threshold
If your taxable turnover falls below £88,000, you can apply to deregister from VAT. This gives you a small buffer zone to avoid repeatedly registering and deregistering around the threshold.
Threshold Stability until 2026
The government has confirmed that both thresholds (£90,000 for registration and £88,000 for deregistration) will remain frozen until at least 31 March 2026.
This provides businesses with certainty for planning purposes over the coming year. Many businesses wonder will VAT threshold increase in 2026, but current policy maintains the freeze.
Making Tax Digital (MTD) for VAT
Making Tax Digital remains one of the most significant HMRC VAT reforms. Originally introduced in 2019 for businesses with turnover above the VAT threshold, MTD became mandatory for all VAT-registered businesses from April 2022, regardless of turnover.
What MTD requires?
MTD for VAT requires you to:
- Keep your VAT records digitally using compatible software
- Submit your VAT returns to HMRC using MTD-compatible software
- Maintain a digital link between your records and the software you use to submit returns
You cannot keep paper records alone or manually type figures from paper records into online forms for VAT filing in the UK purposes. The process must be digital from start to finish.
Choosing MTD-compatible software
HMRC maintains a list of approved software providers on their software choices page. Options range from free basic software for simple businesses to comprehensive accounting packages for larger operations.
Popular choices include:
- QuickBooks
- Xero
- Sage
- FreeAgent
- HMRC’s own basic free software for straightforward businesses
Your chosen software must be able to submit returns directly to HMRC VAT through their API system.
Penalties for Non-Compliance
If you fail to use MTD-compatible software or submit returns through the digital system, HMRC can issue penalties. The points-based penalty system (explained below) applies to late submissions and you may face additional sanctions for failing to keep proper digital records.
Getting help with MTD
If you’re struggling with the transition to digital record-keeping, HMRC offers guidance and support. You can also work with an accountant or bookkeeper who can set up and manage your MTD-compliant systems.
VAT on Private School Fees: A major change
From 1 January 2025, one of the most significant VAT policy shifts in recent years took effect. The long-standing VAT exemption for private education was removed, meaning private schools must now charge VAT on their fees, representing a notable VAT increase in the UK impact for affected families.
How this change operates?
Private schools must charge 20% VAT on fees for any term that begins on or after 1 January 2025. The implementation follows these rules:
- Spring term 2025: If the term started on or after 1 January, VAT applies to the full term’s fees
- Invoices issued before 1 January: If schools issued invoices before 1 January for terms starting after that date, they needed to either issue new invoices with VAT or refund and re-invoice
Who is affected?
This VAT rate change in the UK affects:
- Independent schools in England, Scotland, Wales and Northern Ireland
- Parents paying fees for children at these schools
- Nurseries and pre-schools that are part of private school provision
The policy does not affect state schools or genuinely charitable education activities.
Impact on Parents
For parents, this means a 20% increase in fees unless schools absorb some of the cost. A school charging £15,000 per year will now cost £18,000 per year including VAT. Schools cannot legally absorb the entire VAT cost without restructuring of their fee models.
Impact on Schools
Schools that were previously exempt from VAT can now:
- Charge VAT on their fees (which they must do)
- Reclaim VAT on their expenses (which they couldn’t do before)
This means schools can reclaim VAT on everything from building maintenance to educational supplies. For some schools with high capital expenditure, this may offset part of the competitive disadvantage of charging VAT.
Schools needed to register for VAT before 1 January 2025 if they weren’t already registered. They must now submit regular VAT returns and comply with all Making Tax Digital requirements.
New Penalty System for VAT Returns
HMRC introduced a modernised penalty system for VAT submissions and payments, replacing the old default surcharge system with a more structured approach as part of the HMRC VAT changes.
Points-Based Penalty for Late Returns
If you submit your VAT return late, you receive a penalty point. The number of points you can accumulate before facing a financial penalty depends on how often you submit returns:
- Monthly returns: Financial penalty after 5 points
- Quarterly returns: Financial penalty after 4 points
- Annual returns: Financial penalty after 2 points
Each point stays on your record for 12 months from the return due date. If you reach the threshold, you receive a £200 penalty. Each subsequent late return while at the threshold incurs another £200 penalty.
You can see your points total in your HMRC online account and get one point removed if you submit on time for a full penalty period.
Late Payment Penalties
For late VAT payments, HMRC charges:
- There is no penalty if payment is up to 15 days late, but interest begins to accrue daily from the original payment deadline.
- A first late payment penalty of 3% (increased from 2%) of the VAT owed is charged if the payment is 16 or more days late.
- A second late payment penalty of another 3% is charged if payment is 31 or more days late.
- From day 31, a daily penalty calculated at an annual rate of 10% (up from 4%) is charged on the outstanding amount until payment is made in full.
Interest accrues daily on any overdue VAT from the original deadline until you pay in full.
How to avoid penalties?
- Set up calendar reminders well before VAT deadlines
- Use accounting software that alerts you to upcoming deadlines
- Submit returns early rather than on the last day
- Set up a Direct Debit with HMRC for automatic payment collection
- If you genuinely cannot pay on time, contact HMRC immediately to arrange a payment plan
What are the coming VAT changes in future?
Looking beyond 2025, several potential changes are on the horizon that businesses should be aware of when considering the VAT rate history in the UK and future trends.
Possible Threshold Changes
The VAT threshold increase history shows the registration threshold has been frozen at £85,000 since 2017, only increasing to £90,000 in April 2024. While it’s frozen until March 2026, there’s ongoing policy debate about its future direction.
Some proposals suggest:
- Lowering the threshold to £30,000 to bring more businesses into the VAT system and align with EU levels
- Raising the threshold to £100,000 or higher to reduce administrative burden on small businesses
The government has not announced any definitive plans, but businesses operating near the threshold should stay informed about potential changes.
Making Tax Digital for Income Tax
The MTD program is expanding beyond VAT. From 6 April 2026, self-employed individuals and landlords with qualifying income over £50,000 must keep digital records and submit quarterly updates to HMRC. This threshold lowers to £30,000 from 6 April 2027.
This won’t directly affect your VAT obligations, but if you’re self-employed or a landlord, you’ll need to prepare for additional digital record-keeping requirements.
Review of VAT Rates and Exemptions
The government periodically reviews which goods and services should benefit from reduced or zero rates. Potential future areas of discussion include:
- Environmental considerations (incentivising green products)
- Digital services and online platforms
- Health and social care services
No immediate changes are planned, but it’s worth monitoring government consultations if you operate in potentially affected sectors.
Practical Compliance Checklist for 2025
To ensure you’re meeting all current UK VAT requirements and understanding what the threshold for vat in the UK is, work through this checklist:
For unregistered businesses
- [ ] Monitor your rolling 12-month taxable turnover monthly
- [ ] Understand what counts towards your taxable turnover
- [ ] Know how to register quickly if you approach £90,000
- [ ] Consider whether voluntary registration might benefit you
For VAT-registered businesses
- [ ] Confirm your accounting software is MTD-compatible
- [ ] Keep all VAT records digitally with proper backup systems
- [ ] Submit returns through your MTD software for proper VAT filing in the UK, not manually
- [ ] Set up payment reminders or Direct Debit to avoid late payment penalties
- [ ] Review your VAT fraction to ensure you’re charging the correct rates
- [ ] Keep evidence to support zero-rated or reduced-rate supplies
- [ ] If you supply private education, ensure VAT is correctly charged from 1 January 2025
For all businesses
- [ ] Understand which VAT rate in the UK applies to your products or services
- [ ] Keep proper invoices for VAT you pay on business expenses
- [ ] Know the difference between exempt and zero-rated supplies
- [ ] Set aside money monthly to cover your VAT bill
- [ ] Consider working with an accountant for complex VAT situations
Getting Professional Help
VAT can become complicated, especially if you:
- Sell both standard-rated and zero-rated goods
- Export goods or services internationally
- Operate a partial exemption business
- Run a VAT flat rate scheme
- Deal with second-hand goods, margin schemes or tour operators’ schemes
In these situations, professional advice from a qualified accountant or VAT specialist can save you money and prevent costly mistakes. The fees are typically tax-deductible and often pay for themselves through proper VAT planning.
Conclusion
The UK VAT system in 2025 remains largely unchanged in rates and thresholds, but businesses face stricter compliance duties under Making Tax Digital (MTD) and HMRC’s new penalty system. The introduction of VAT on private school fees is the most notable policy shift, affecting many families and education providers.
Businesses nearing the £90,000 VAT registration threshold should prepare early by adopting MTD-compatible software, identifying applicable VAT rates and maintaining strong record-keeping to ease the registration process.
For VAT-registered businesses, regular reviews, timely filings and awareness of policy updates help avoid penalties and optimise VAT planning. HMRC’s online resources and professional advice remain valuable for staying compliant and ensuring correct tax treatment.
Frequently asked questions
What is the VAT threshold for 2025 in the UK?
The VAT registration threshold in the UK for 2025 is £90,000 of taxable turnover in any rolling 12-month period. This threshold applies until at least 31 March 2026. You must register within 30 days of the end of the month when you exceed this threshold.
Do I need to use Making Tax Digital if I’m VAT registered?
Yes, absolutely. Since April 2022, all VAT-registered businesses must use MTD-compatible software to keep digital records and submit VAT returns, regardless of their turnover. You cannot submit VAT returns manually or use paper records alone.
Can I still claim VAT back on business expenses if I’m not VAT registered?
No. You must be VAT-registered to reclaim VAT on your business expenses. If you’re not registered, the VAT you pay becomes part of your costs. This is one reason why some businesses choose to register voluntarily even when below the threshold.
When did private schools start charging VAT?
Private schools began charging 20% VAT on fees from 1 January 2025. The VAT applies to any term that starts on or after this date. Schools that were previously exempt from VAT had to register and implement VAT charging systems.
What happens if I submit my VAT return late?
Under the new points-based system, you receive penalty points for late submissions. After accumulating 4 points (for quarterly returns) or 5 points (for monthly returns), you face a £200 financial penalty. Each subsequent late return while at the threshold incurs another £200 penalty.
How do I know if my accounting software is MTD-compatible?
Check HMRC’s official list of compatible software on their website. Most major accounting software packages like QuickBooks, Xero, Sage and FreeAgent are MTD-compatible. Your software provider should clearly state whether their product meets MTD requirements.
What is the threshold for VAT in the UK?
The VAT registration threshold is £90,000 in taxable turnover within any 12-month rolling period, effective for 2025 and confirmed until March 2026.
Will the VAT threshold increase in 2026?
The threshold is confirmed to remain at £90,000 until at least 31 March 2026. What happens after that date hasn’t been announced. There’s policy discussion about potentially lowering it to £30,000 or raising it to £100,000, but no decisions have been made yet regarding the VAT threshold increase.
What’s the difference between zero-rated and exempt supplies?
Zero-rated supplies are taxable at 0%, meaning you charge no VAT but can still reclaim VAT on related expenses. Exempt supplies are outside the VAT system entirely, so you cannot reclaim VAT on costs related to making those supplies. Zero-rated is generally better for businesses as you can recover input VAT.
