The VAT hike could cost you £450
We could become £448 poorer in 2011 thanks to the VAT hike. What will the increase mean for you and are there any tricks to beat it?
From 4 January, the rate of value added tax (VAT) will increase from 17.5% to 20% making many everyday items more expensive in 2011 than in 2010.
In fact, a report from data management firm Acxiom has found the increase will cost the average household £225 a year – soaring to £448 for more comfortable groups.
What the hike will mean for prices
Although the increase might seem negligible on inexpensive items, it will add up over the course of a year.
An item costing £1 before the hike will increase to £1.02, purchases of £5 will increase to £5.11 and something costing £100 will become £102.13.
Not surprisingly, the hike will be even more painful on larger purchases. Say you’re planning to buy a new car in 2011 or redecorate the house – something that would have been £12,000 will jump to £12255.32 adding more than £255 to the price.
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Does VAT apply to everything?
Some items are exempt from VAT including ‘essential’ foods, books, newspapers, magazines and children’s clothes.
Furthermore, some goods such as children’s car seats are taxed at a reduced rate of 5%.
Act fast if you want to save…
Although 4 January is looming it is still possible to save money by squeezing in new purchases – perhaps by shopping online or visiting the sales. As long as you pay before 4 January, the VAT will be 17.5% regardless of when the item is delivered.
Bear in mind, however, you will need to pay the full amount before 4 January. A deposit paid before 4 January would be charged at 17.5% but the remainder would incur the 20% rate if paid after the increase.
Lower the cost of your food bills
When it comes to your food bill, you could save money by knowing which items incur VAT and which are exempt.
Shopping website mySupermarket.co.uk has published some bizarre discrepancies related to VAT on food. For instance, a gingerbread man will not attract VAT if it has two chocolate eyes but becomes taxable if it contains any more chocolate.
Chocolate coated biscuits are subject to VAT but chocolate chip cookies are not. Likewise, you pay VAT on nuts without shells but will not pay the tax on nuts that come in shells.
For more information on which foods are exempt from VAT see the HM Revenue & Customs website.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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