You must register for VAT when your taxable turnover goes over £90,000 in any rolling 12-month period, or when you expect it to go over £90,000 in the next 30 days alone. That is the UK VAT registration threshold, and it applies equally to a limited company and a sole trader. Below it you can still register voluntarily, and many limited company contractors do. Once you are registered, you charge VAT on taxable sales, file returns through Making Tax Digital software, and owe VAT to HMRC from your effective date of registration, whether or not your VAT number has arrived.
This guide is for limited company and self-employed contractors. If you are paid through an umbrella company, the umbrella handles VAT administration and this does not apply to you.
The UK VAT registration threshold in 2026
The VAT registration threshold is £90,000 for the 2026/27 tax year. It has been £90,000 since 1 April 2024, when it rose from £85,000 after a long freeze. No changes to the threshold were announced at the 26 November 2025 Budget, so there is no increase to plan around this year. The deregistration threshold is £88,000.
Three points catch people out straight away:
- The threshold is based on turnover, not profit. A contractor with £95,000 of invoices and £30,000 of profit is over the line.
- It applies to taxable turnover, which is wider than most people assume.
- It applies whatever your business structure. A sole trader whose taxable turnover exceeds £90,000 must register, just as a limited company must.
A question searchers ask is whether you pay VAT on the first £85,000 (or now £90,000) of turnover. In effect, you do not. VAT is charged on sales from your effective date of registration, and the threshold is the point at which registration becomes compulsory. The difficulty is that sales made after the date you should have registered carry VAT whether or not you charged it.
So how much can a company earn before registering for VAT? Up to £90,000 of taxable turnover in any 12-month period, provided you do not expect to pass £90,000 in the next 30 days. Small businesses below that level do not need to be VAT registered, unless they choose to be.
| Test | Trigger | Register by | Effective date of registration |
|---|---|---|---|
| Looking back | Taxable turnover for the last 12 months goes over £90,000 | 30 days from the end of the month you went over | First day of the second month after you went over |
| Looking forward | You expect taxable turnover to go over £90,000 in the next 30 days alone | The end of that 30-day period | The date you realised |
The effective date of registration is the date from which you owe HMRC VAT. It matters more than the date your registration certificate arrives.
What counts as taxable turnover
HMRC's guidance defines taxable turnover as the total value of everything you sell that is not VAT exempt or "out of scope". That includes:
- standard-rated, reduced-rated and zero-rated sales
- goods you hire or loan to customers
- business goods used for personal reasons
- goods you barter, part-exchange or give as gifts
- services you receive from businesses abroad that you have to reverse charge
Zero-rated sales still count towards the threshold. Exempt sales and out-of-scope sales do not. Most contractors sell standard-rated services, so for most readers taxable turnover is simply what you invoice, excluding VAT.
The VAT rules also catch you if you take over a VAT-registered business. You must register if the combined taxable turnover of the new business and your existing one is over the threshold.
Compulsory registration: the rolling 12-month test
The test is not your tax year or your company's accounting year. At the end of every month, add up your taxable turnover for that month and the preceding 11. The Low Incomes Tax Reform Group (LITRG) makes the point that you must register if your taxable turnover in any consecutive 12-month period reaches the limit, not just in your accounting period.
HMRC's example: on 15 July your turnover for the last 12 months is £100,000, and that is the first time it has gone over. You must register by 30 August. Your effective date of registration is 1 September.
A contractor's version of the same thing: suppose your turnover for the 12 months to 31 August 2026 comes to more than £90,000. You need to register by 30 September 2026, and you would usually charge VAT from 1 October 2026. If you bill a steady monthly amount, you can see this coming months ahead, which is the argument for checking every month rather than once a year.
The threshold has no phase-in or tapering. That is why some small businesses hold turnover just below it, and why HMRC and Office for Budget Responsibility data have shown bunching of businesses around the VAT registration threshold. It is also why you should speak to an accountant well before you approach £90,000.
The next 30 days: the forward-looking test
This is the test that catches contractors with one big contract. If you realise that your taxable turnover is going to go over the threshold in the next 30 days, you must register by the end of that 30-day period. In practice, ITContracting's advice is that you register right away. Your effective date is the date you realised, not the date the money arrived.
HMRC's example: on 1 May you arrange a £100,000 contract and expect to be paid at the end of May. You must submit your application by 30 May, and your effective date of registration is 1 May. VAT is due on that work from 1 May even though you apply later in the month.
The forward test looks at a single 30-day window on its own. It is not a prediction of the next year.
What happens if you register late
If you register late, you must pay VAT on the sales you have made since the date you should have registered. You cannot usually recover that from clients after the event, so it often comes out of your own pocket. You may also face a penalty, depending on how much you owe and how late you are. One accountancy firm's guide puts the late registration penalty at 5% of the VAT due if you are no more than 9 months late, 10% if you are more than 9 but not more than 18 months late, and 15% beyond that, with a £50 minimum.
If you think you have already gone over, tell HMRC as soon as possible. You will need to work out when your taxable turnover first went over £90,000 and register from that date.
Temporary breaches, exemptions and splitting the business
Exception. If your taxable turnover goes over the threshold only temporarily, you can apply to HMRC for a registration exception. HMRC considers it and writes to confirm. If you do not get one, HMRC registers you. A one-off project is the classic case. A contractor accountant at Abbott Moore says that if HMRC is satisfied the project is an anomaly and you will not breach the threshold in future, you will not have to register. Expect to need evidence. One accountancy firm advises showing that turnover will stay below the £88,000 deregistration threshold over the following 12 months, and you still need to tell HMRC about the breach.
Exemption. If most of your taxable sales are zero-rated, you can ask HMRC for permission not to register. This is called exemption from registration. It rarely applies to a contractor selling standard-rated services.
Splitting. Can you split your business to stay under the threshold? Not safely if the split is artificial. A contractor with a large project might think about running part of the work through a second entity. Abbott Moore points to a well-known test case in which two publicans, one selling the beer and one the food, set up separate businesses to stay under the threshold. HMRC's view was that this arrangement is treated as a single business for VAT. A genuinely separate commercial business is a different matter, but you must be able to demonstrate that it is one. Take advice before acting, not after.
Should you register voluntarily?
You can choose to register for VAT at any turnover if you make taxable supplies. HMRC calls this voluntary registration. If your turnover is below £90,000 you can still register for UK VAT, and from the moment HMRC registers you, you owe it any VAT you should be paying.
It tends to help when:
- your clients are VAT-registered businesses, who can reclaim the VAT you charge
- you have significant VAT on your own costs, such as equipment, software or professional fees
- you want to look established to larger business clients
It tends to hurt when:
- your customers are consumers or businesses that cannot reclaim VAT, so you either raise your prices by 20% or absorb it and lose margin
- your costs carry little VAT, so there is little to reclaim
- you make a mix of taxable and exempt supplies, which can restrict what you reclaim
Most limited company contractors sell to agencies or end clients that are themselves VAT registered. For them the VAT on your invoice is neutral to the client, and you gain the ability to reclaim VAT on your business spending. That is why ITContracting reports that most limited company contractors register early, and that accountants commonly advise registering regardless of current turnover.
The drawbacks are real, though. You take on a VAT return every quarter. You hold the VAT you collect on behalf of HMRC, so it should not be treated as spendable cash. And if you collect more VAT than you pay out, you owe the difference.
The decision depends on who your clients are. A contractor selling to VAT-registered clients will usually find early registration costs little. A contractor whose clients are members of the public is in a different position.
If you are still setting the company up, our guide to setting up a limited company as a contractor covers the first weeks, and registration is one of the early decisions.
Choose the right VAT scheme
Registering and choosing how you account for VAT are separate decisions. How VAT works under each scheme differs, so choose the right VAT scheme before your first return rather than after.
Standard accounting. You charge VAT at 20% on your invoices, reclaim the VAT on your purchases, and pay HMRC the difference. It suits businesses with meaningful costs.
Flat Rate Scheme. You still charge your clients 20%. But you pay HMRC a fixed percentage of your VAT-inclusive turnover and keep the difference. The catch is that you cannot reclaim VAT on purchases, other than certain capital assets costing over £2,000. You may be able to join if your VAT turnover is £150,000 or less, excluding VAT, and you must apply to HMRC. The percentage depends on your business sector, and for IT contractors ITContracting gives a typical figure of 14.5%. It is usual to get a 1% discount on the rate in your first year of VAT registration.
Cash accounting and annual accounting are the other options. Cash accounting means you pay VAT when your customers pay you, and reclaim it when you pay suppliers. Annual accounting means one return a year with advance payments. Both are open to businesses with estimated taxable turnover of £1.35 million or less.
HMRC itself says to talk to an accountant or tax adviser if you want advice on whether the Flat Rate Scheme is right for you.
The limited cost trader rate: 16.5%
Since April 2017, the limited cost trader rules have removed much of the benefit of the Flat Rate Scheme for small companies with low costs, and ITContracting says most contractor companies fall into that category. A limited cost business pays 16.5% rather than its sector rate. Whether you are one depends on your spending on what HMRC calls "relevant goods", and you should check the definition on GOV.UK against your own cost base before joining.
Here is why this matters, using round numbers for illustration. You invoice £10,000 plus £2,000 VAT, so £12,000 in total. The flat rate applies to the VAT-inclusive figure.
| Rate | Paid to HMRC | VAT you keep | |
|---|---|---|---|
| Sector rate | 14.5% | £1,740 | £260 |
| Limited cost trader rate | 16.5% | £1,980 | £20 |
At the limited cost rate, the scheme leaves you with almost none of the VAT you charged, and you have given up the right to reclaim VAT on your costs. Under standard accounting you would pay £2,000 less the VAT on your purchases. So the Flat Rate Scheme is better only if your input VAT is small and you would not be caught by the limited cost rules, which is often not the case for a contractor.
We look at the scheme in more detail in our guide to the flat rate VAT scheme for contractors.
Invoicing VAT to your client
Once you are VAT registered, you add VAT at the appropriate rate to your invoices for taxable sales. For most contractors that is the standard rate of 20%. Your VAT invoices need to show your VAT number, the VAT rate, the VAT amount, and the net and gross totals.
Waiting for your VAT number
You owe VAT from your effective date of registration, but you cannot show VAT on an invoice until you have your VAT number. Can you charge VAT while waiting for your VAT number? No. HMRC's stated target is a registration certificate within 14 working days, though it can take longer, and some new companies have waited more than a month. Plan for the longer end.
To deal with VAT in the gap:
- Do not add VAT to invoices before you have the number.
- Agree pricing with your agency or client on a VAT-inclusive basis, and reissue invoices once registration is confirmed.
- Tell your client early. Agencies deal with this regularly.
The VAT is still yours to account for from the effective date, so build it into your pricing from the start. A delay in your VAT number does not mean VAT is not yet due.
Your first VAT return, payment and penalties
Most businesses file a VAT return quarterly. Returns are usually due, with payment, within one month and 7 days of the end of the period. For the three months to 30 June 2026, for example, both the return and the payment are due by 7 August 2026. A direct debit with HMRC avoids missed payments.
Keep your VAT records, including invoices and receipts, for at least six years.
The penalties for non-registration and for unpaid VAT liabilities have teeth. For quarterly returns a late filing penalty of £200 applies once you reach four penalty points. For late payment of VAT, there is no penalty if you pay or agree a payment plan within 15 days of the due date. After that a first penalty of 2% of the outstanding VAT applies at day 15, a further 2% at day 30, and daily interest follows.
Making Tax Digital for VAT
When you register for VAT, online or on paper form VAT1, you are automatically registered for Making Tax Digital (MTD) for VAT. LITRG's guidance is clear that you must comply as soon as you are registered unless HMRC grants you an exemption. That applies to voluntary registrations too.
In practice that means:
- you keep at least some of your records digitally
- you submit VAT returns through MTD-compatible software
- you need that software ready before your first return is due, not after
Do you need new software once you register? If you do not already use MTD-compatible software, yes. If you already use cloud accounting software for your company, you are probably well placed. If you are on spreadsheets, sort this out before you register. Your accountant will normally handle the submission for you.
How to notify HMRC and register for VAT
Most businesses register online through HMRC's VAT registration service, using Government Gateway login details and the business's Unique Taxpayer Reference (UTR). A limited company will typically need its company name and number, turnover and nature of business, bank details, and corporation tax and PAYE details. A sole trader will need their National Insurance number, proof of ID and details of turnover. An accountant can register on your behalf.
Some applications go on paper form VAT1, for example if you are applying for an exemption from registration.
Leaving VAT later
If you expect your taxable turnover to stay below £88,000 for the next 12 months, you can apply to cancel your registration. Deregistration is not compulsory. You must cancel if you stop trading, within 30 days of ceasing to trade. Either way, your accountant will need to submit a final VAT return covering the period up to deregistration, and you keep your VAT records for six years afterwards.
When to involve an accountant
You can register for VAT yourself. An accountant earns their fee in these situations:
- you are within a few months of the threshold and want to plan the effective date and your pricing
- you have a large one-off contract and want to know whether to ask for an exception
- you are weighing standard accounting against the Flat Rate Scheme and need to test the limited cost rules against real costs
- you are thinking of running work through a second entity
- you have crossed the threshold and are not sure when
Deplexify prepares accounts and tax filings for UK contractors, and our contractor accounting page sets out what that covers.
Frequently Asked Questions
Will the VAT threshold increase in 2026?
The threshold is £90,000 for 2026/27, and no change was announced at the 26 November 2025 Budget. Check HMRC's guidance before you rely on a figure for a later year.
Is the VAT threshold based on turnover or profit?
Turnover. Specifically, taxable turnover, which includes standard-rated, reduced-rated and zero-rated sales. Exempt and out-of-scope sales do not count.
Does the threshold apply to contractors and sole traders?
Yes. The £90,000 threshold applies whatever your business structure, so a sole trader and a limited company contractor are tested the same way.
Can I register for VAT if my turnover is below £90,000?
Yes. Voluntary registration is open to any UK business that makes taxable supplies. Whether it is worth it depends mainly on whether your clients can reclaim VAT and how much VAT you pay on your costs.
Can I split my business to stay under the threshold?
Not if the split is artificial. HMRC can treat artificially separated businesses as a single business for VAT. A genuinely separate commercial business can have its own VAT position, but you must be able to demonstrate that it is one.
Does VAT apply from the day I notify HMRC?
No, it applies from your effective date of registration. Under the rolling 12-month test that is usually the first day of the second month after you went over the threshold. Under the 30-day test it is the date you realised you would exceed it.
Sources
- Register for VAT: When to register for VAT - GOV.UK — gov.uk, read 2026-10-19
- VAT Flat Rate Scheme : Overview - GOV.UK — gov.uk, read 2026-10-19
- Register for VAT: When to register for VAT - GOV.UK — gov.uk, read 2026-10-19
- IT contractors and VAT - what it is, and how to register (2026 guide) — itcontracting.com, read 2026-10-19
- Crossing the VAT Threshold: What to Do Before You Hit £90,000 Turnover : — fhpaccounting.co.uk, read 2026-10-19
- VAT when running a business | Low Incomes Tax Reform Group — litrg.org.uk, read 2026-10-19
- Contractor Doctor: How can I stay under the VAT threshold when using subcontractors? — contractorcalculator.co.uk, read 2026-10-19
- Why the VAT registration threshold is a problem for small businesses - ByteStart — bytestart.co.uk, read 2026-10-19
- What is the VAT Threshold? A Guide for the Self-Employed - Gorilla Accountants — gorillaaccounting.com, read 2026-10-19
- VAT Registration Guide for Contractors | BI Accountancy — biaccountancy.com, read 2026-10-19
- How to register for VAT in the UK (2026-27 guide) — simplybusiness.co.uk, read 2026-10-19