How would a VAT increase to 25% affect you?
Published 27 November 2012 by Helen Gradwell
The Institute of Fiscal Studies has said that VAT may need to be increased to 25% in order to meet future debt targets. If this were to happen, the prices of certain products would be affected.
The current rate of VAT (Value Added Tax) is 20% - but this may need to be increased to 25% to help the UK economy recover, according to the Institute of Fiscal Studies (IFS).
VAT is automatically added to many of the things you buy - for example clothing, restaurant meals and gadgets.
The IFS has said that the Chancellor George Osborne would have little to no chance of meeting his debt targets for 2018 in the current economic climate - unless he announces £23 billion of tax rises or spending cuts.
Apparently, this would be "roughly equivalent to increasing the main rate of VAT from 20 per cent to 25 per cent" - or putting even deeper welfare cuts in place.
How would prices change after a potential VAT rise?
If VAT went up to 25%, it would affect the price of most, but not all, of your purchases.
Let's say that you're planning to have a new bathroom fitted. According to Which? the average price of having a new bathroom fitted is £3,000. At the moment, this price would include £500 of VAT at 20%.
If VAT went up to 25%, the cost would rise to £3,125 - adding an extra £125 on.
Here's how some other common items could be affected by a potential VAT increase:
• A new Ford Focus, priced at £13,995 on the Ford website = £14,577.
• A pint of beer in a pub at £3.20 = £3.34.
• A large pizza from a takeaway priced at £10 = £10.43.
• A 32" 3D TV from Sony for £649 = £676.
• A pair of new Adidas trainers for £60 = £62.50
As you can see, less expensive items may go up in price by only a pound or two (or even pennies) - but for more expensive items, there's a big price difference.
Items that won't change in price
Some products are exempt from VAT altogether, such as insurance, charity fundraising events and betting.
Other products aren't taxed at the moment, but tax could be introduced in the future if necessary. These are 'zero-rated' items, and this category includes things like most food (unless it comes from a restaurant), books, newspapers and children's clothing.
Some products are taxed at a reduced rate of 5%. This category includes energy for your home and children's car seats.
An expert from thinkmoney said: "No VAT increase has been officially announced - but economists have suggested it may be necessary. If it does happen, a lot of people will have to take a fresh look at their budget.
"If VAT does go up to 25%, your daily spending may increase slightly. For some, this won't be an issue.
"If you're on a tight budget, however, these small price rises may take their toll. And it's not only VAT that causes price rises - for example the prices of food and fuel rise regularly.
"It can therefore really help to keep an eye on your daily, weekly or monthly spend. That way you can make sure you're budgeting properly, and you'll have enough left over to pay your bills and put food on the table.
"If you find budgeting difficult, there are accounts available that will do it for you. The thinkmoney Managed Current Account gives you access to a personalised budgeting service. An expert will help you manage your account and make sure that you have enough put aside to deal with your essential expenses."