What Does The VAT Increase Really Mean For You?

7 July 2010, 10:09

The biggest item of news regarding VAT in recent weeks has come courtesy of the emergency Budget from the new coalition government. There cannot be many people now who don’t know that the rate of VAT will soon go up to 20%, from the current rate of 17.5%. For many people this will be the highest rate of VAT in living memory.

But how will all this affect you? Some people might assume that if they do not own a business they won’t be bothered by such rises. But this is not the case. Since VAT is levied on most things we buy, we can all expect to start paying more for our goods than we did before.

For example let’s say the base price of an item is currently £1.70. Add 17.5% VAT onto that and we get the total price of £2.00. But if we add 20% VAT onto it instead, we will now be paying £2.04 for each item.

It doesn’t sound much different does it? But what we must all remember is that the cumulative effect of the VAT increase will be the telling thing. How much more will we pay over the course of six months for example, or a whole year? This is where the increase will start to become known.

Some experts have calculated that we can all expect to pay around £450 to £500 more each year as a result of this seemingly small increase in VAT. The difference of course is that it is small enough that we won’t notice it on a daily basis. But it still adds up over time. How much it does so depends on the evaluation and calculations you happen to read.

The good thing about VAT being changed in this way is that we still have the final say on what we buy. If income tax was changed we have no say in whether we pay it or not. But to an extent we do have a say in VAT. If we dislike the new higher price on certain items we could elect not to buy them, or t find cheaper alternatives. So in a sense we do have some power over how we will be affected by it.

It will still be interesting to see how the change in the rate of VAT will affect the deficit over the long term. We shall be watching.