Is there VAT on Payroll?

Are you an employer wondering whether you can claim back VAT on payroll? Then read on! In this guide, you’ll find out whether there is VAT on payroll so that you can reduce your VAT bill.

Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.

1. Is there VAT on Payroll?

There is no VAT on payroll. That’s because wages and salaries paid under the PAYE system are outside the scope of VAT, meaning they won’t appear on the VAT return.

The reason there is no VAT on payroll is that the gross salary you pay your employees are not VAT-able and individuals on payroll are not required to register for VAT.

2. Outside the Scope of VAT v. Zero Rated

There are three main VAT rates:

  • Standard Rate (20%)
  • Reduced Rate (5%)
  • Zero Rate (0%)

Zero-rated means that the goods are still VAT-taxable but the rate of VAT charged 0%, so they must still be included on VAT returns.

Expenses, like payroll, insurance and bank charges are outside the scope of VAT (also referred to as exempt), so do not appear on VAT returns.

Related:

Taxes are changing! From April 2024 sole traders will need to report their earnings and pay tax on a quarterly basis. This is known as Making Tax Digital, which you can read more about in this guide to help you get prepared.

About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.