VAT increase will cost families £448 a yearValue Added Tax (VAT) is set to rise from 17.5% to

20 December 2010

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Value Added Tax (VAT) is set to rise from 17.5% to 20% on the 4 January 2011, meaning many items are going to be more expensive next year.

The change, announced in this year's emergency budget, is set to raise an extra £13bn a year in revenue to help rebuild Britain’s public finances. However, economists have also predicted it will cost the average middle class family up to £448 a year.

In a recent speech, Chancellor George Osborne dashed any hope that the increase in VAT was a temporary measure, insisting it was a necessary change to the tax system in order to tackle the structural deficit.

However, not all transactions and purchases are subject to VAT, and many items have the tax added to their cost at a reduced rate.

VAT-exempt and reduced-rate items

Most foods (except restaurant and hot take away foods), as well as books, newspapers, public transport and children's clothes are not subject to VAT.

Goods and services that attract reduced-rate VAT of 5% include domestic fuel and power, the installation of energy-saving materials, residential conversions, women's sanitary products and children's car seats. For further information on when you do, and don’t, have to pay VAT, read this mini VAT guide.

Yet, even though groceries are largely exempt from the tax, research carried out by comparison site mySupermarket has found that consumers can expect to pay an extra £33 a year on their supermarket shopping. 

The study highlighted some of the strange and inconsistent aspects of the tax and how it is levied: for example, unshelled salted nuts and tortilla chips are exempt from VAT, but shelled salted nuts and potato crisps are liable for full-rate VAT. You can read more about mySupermarket's research in this news story.

Beat the VAT rise

You can fight back against rising costs by reading the Which? website's guides to Bills and Budgeting. On this section of the site, you'll find articles on everything from cutting the cost of grocery shopping to saving money on motoring.

In addition, if you are planning to buy a big ticket item such as a new TV or fridge-freezer next year, you may want to consider bringing your purchase forward. You can read more about the pros and cons of doing so in our Buy now to beat the VAT hike news story.

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