VAT

Value added tax (VAT) is payable to the government by a business. VAT is a purchase tax added onto items that are bought, except things that are zero-rated, such as food, because these are deemed essentials.

VAT is a percentage of the cost and this is determined by the government. Currently it stands at 20% having been increased from 17.5%.

Example

A car costs £19,800 including VAT. VAT is charged at 20% so £19,800 represents 120% of the price before VAT. What is the price before VAT?

10% is: \pounds 19,800 \div 12 = \pounds 1,650

100% is: \pounds 1,650 \times 10 = \pounds 16,500

The price before VAT is added is £16,500.

Question

Sue invests £2,000 in an account for two years. The account pays 4% compound interest per annum.

Sue has to pay 20% tax on the interest earned each year. This tax is taken from the account at the end of each year.

How much money will Sue have in her account at the end of two years?

After the first year Sue will earn 4% interest.

\pounds 2,000 \times 0.04 = \pounds 80

So she earns £80 interest which is then taxed at 20%.

10% is: \pounds 80 \div 10 = \pounds 8

So 20% is: \pounds 8 \times 2 = \pounds 16

Therefore the total interest paid is \pounds 80 - \pounds 16 = \pounds 64. So after one year she has \pounds 2,000 + \pounds 64 = \pounds 2,064 in the bank.

After the second year, Sue will earn another 4% interest.

\pounds 2,064 \times 0.04 = \pounds 82.56

So she earns £82.56 interest which is then taxed at 20%.

10% is \pounds 82.56 \div 10 = \pounds 8.256

So 20% is \pounds 8.256 \times 2 = \pounds 16.51 (rounded to 2 dp)

Therefore the total interest paid is \pounds 82.56 - \pounds 16.51 = \pounds 66.06. So after two years she has \pounds 2,064 + \pounds 66.06 = \pounds 2,130.06 in the bank.

Move on to Video
next