Tax – Calculating Percentages on Goods and Income

Tax is a compulsory payment collected by governments on goods, services, income, and transactions. Understanding how tax is calculated as a percentage is essential for everyday life — from shopping to payslips.

Value Added Tax (VAT) — the model behind the UK's 20% standard rate used in the examples below — was first introduced in France in 1954 as taxe sur la valeur ajoutée, designed to collect tax at each stage of production rather than only at the final sale. It has since been adopted by more than 160 countries worldwide, usually under the name VAT or GST (Goods and Services Tax). Because tax rates and thresholds change with government policy, being able to calculate tax-inclusive and tax-exclusive prices confidently is a skill that stays useful regardless of what the current rate happens to be.

Types of Tax

Tax Type	What It Applies To	Typical Rate (UK example)
VAT (Value Added Tax)	Most goods and services	20% standard rate
Income Tax	Earnings above a threshold	Various bands (20%, 40%, 45%)
Council Tax	Residential properties	Varies by local authority
Stamp Duty	Property purchases	Varies by price band

Calculating Tax on a Purchase

Tax Amount = Tax Rate% times Original Price / 100. Total Price = Original Price plus Tax Amount. Or: Total = Original times (1 + Tax%/100).

Worked Examples

VAT at 20% on a 350 item.

VAT = 20% of 350 = 70. Total price = 350 + 70 = 420. Or: 350 times 1.20 = 420.

A price tag shows 480 including 20% VAT. Find the pre-tax price.

480 = pre-tax price times 1.20. Pre-tax = 480 / 1.20 = 400.

A salary of 30,000. The first 12,570 is tax-free. 20% tax on the rest.

Taxable income = 30,000 - 12,570 = 17,430. Tax = 20% of 17,430 = 3,486. Take-home = 30,000 - 3,486 = 26,514.

Tax-Inclusive vs Tax-Exclusive Prices

Scenario	Calculation
Add tax to a price	Price times (1 + rate/100)
Find pre-tax from inclusive price	Inclusive price divided by (1 + rate/100)
Find how much tax was paid	Inclusive price minus pre-tax price

Key Takeaways

Tax is calculated as a percentage of the taxable amount.
Total price (tax-inclusive) = pre-tax price times (1 + tax rate/100).
To find the pre-tax price: divide the inclusive price by (1 + tax rate/100).
Always check whether a quoted price includes or excludes tax.

Practice: Tax

Find the Total with Tax