VAT and the taxes hidden in spending
The nutshell
VAT is a tax added to the price of most things bought in the shops. It is already inside the price on the label, so it is easy to miss.
Every fact on this page comes from official tax rules and non-partisan research. Each source tag — like GOV — opens where a fact comes from.
The basics
What VAT is
VAT stands for Value Added Tax. It is a tax added to the price of most things bought in the UK. The standard rate is 20%, so a £10 item before tax costs £12 once 20% VAT is added.GOV The shop collects the tax and passes it to the government.
Why it is hidden
On a shop shelf, the price already includes VAT. GOV.UK says VAT is normally part of the price shown in shops.GOV So the tax is paid at the till without a separate line for it. That is why VAT is sometimes called a hidden tax.
When VAT is lower, or none at all
Not everything pays the full 20%. Home energy and children's car seats are charged a reduced rate of 5%.GOV Most food and children's clothes are zero-rated, which means the VAT rate is set at 0% and no tax is added.GOV
The other taxes on spending
VAT is not the only tax hidden in a price. Fuel, alcohol and tobacco each carry an extra tax called a duty, on top of VAT.GOV Income tax, National Insurance and VAT together raise the largest share of the government's money, the House of Commons Library reports.HoC
- VAT is added to almost every sale and collected by the shop, so it reaches a very wide range of spending, GOV.UK sets out.
- Lower rates on essentials, like the zero rate on most food, reduce the tax added to everyday basics, GOV.UK shows.
- VAT and other spending taxes raise a large, steady share of government money, the Institute for Fiscal Studies reports.
- The same VAT rate is added whoever buys an item, so it takes the same cash from every shopper whatever that shopper earns.
- Because the tax sits inside the shelf price, the amount paid in VAT is easy to overlook, GOV.UK notes.
- Duties on fuel, alcohol and tobacco add further tax on top of VAT for some purchases, GOV.UK lists.
The deep end6 min
How VAT works, step by step
VAT is a tax on the value added at each stage of making and selling something. A business charges VAT on what it sells and reclaims the VAT it paid on what it bought. The difference is handed to HM Revenue and Customs. GOV.UK sets three rates: a standard rate of 20%, a reduced rate of 5% on items such as home energy and children's car seats, and a zero rate of 0% on items such as most food and children's clothes.GOVA few things, such as postage stamps and most financial services, are exempt, which is different from zero-rated.
How much VAT raises
VAT is the UK's third-largest tax and raises around 15% of all tax revenue, according to the Institute for Fiscal Studies.IFS The House of Commons Library reports that income tax, National Insurance and VAT are the three main sources of government income, together raising about £718 billion in 2025/26.HoC
The other taxes hidden in spending
VAT sits alongside a set of other taxes on spending, known as indirect taxes. GOV.UK lists extra duties on fuel, on alcohol and on tobacco, plus Insurance Premium Tax on many insurance policies and Air Passenger Duty on flights.GOVThe Institute for Fiscal Studies notes that fuel duties raise the most among these other indirect taxes.IFS
Why some things are taxed less
The reduced and zero rates are choices about which spending carries the full tax. GOV.UK zero-rates most food and children's clothes, and charges the reduced 5% rate on home energy and children's car seats.GOV A lower rate on everyday essentials lowers the tax added to those items. How far spending taxes should fall on essentials is a question Parliament decides at each Budget, and the topics on where the government gets its money and on Income Tax look at the wider choices.