Value added tax (VAT) is charged as a percentage of the price of a product or service. So the first thing we need to know is how to calculate a percentage.
The way I like to think of percentages is to break up the word into “per” and “cent”. And since “cent” is short for “century” (think a hundred in years and cricket), percent means “per hundred”.
The current VAT rate is 15% – 15 per hundred – meaning you pay R15 of VAT per R100 of cost. For something that costs R100 excluding VAT, we just need to add the R15 VAT to the price, giving us a total of R115 including VAT.
To calculate the VAT payable on any amount, it helps to remember that VAT is charged as a percentage “of” the purchase price. And in maths, the word “of” simply means to multiply.
To calculate the VAT (15%) of something that costs R25 means we need to multiply R25 by 15%. And since we now know that 15% is just (15/100) we can multiply it by R25. Like this:
To get the total cost including VAT, we add the VAT of R3.75 to the purchase price of R25, which gives us R28.75. Easy as that.
Now that you know the math to calculate VAT, let’s look at a shortcut. To get the total cost of a price including VAT, multiply that price by 1.15. Why 1.15? 15/100 = 0.15 which you need to add to the price (1.00)*.
Going back to the previous example, the total cost of R25 including VAT would be: R25 x 1.15 = R28.75.
It’s useful to know how to calculate the after VAT cost of items, as you won’t be left wondering what the final cost will be. It also means you will be able to make a like for like comparison when assessing two products. For example, some investment fees are quoted excluding VAT. If you are presented with two identical investment options, with option 1 charging 1.00% excluding VAT and option 2 charging 1.1% including VAT, you will now know that the total cost of option 1 is 1.00 x1.15 = 1.15%, and is, therefore, the more expensive option.
*In this case 1.00 represents 100% of the price, see?
Our friend Stealthy Wealth knows his way around maths. Luckily for us he also speaks human, which is why we asked him to explain the most important maths we need to know to be good at money. This is not your average maths class. Become a money mathemagician with our Wealthy Maths blog.