VAT to rise to 20%

22 June 2010

VAT rates will go up from 17.5% to 20% on 4 January next year, George Osborne announced in his first Budget speech as chancellor.

While he announced that the coalition government’s aim is to reduce the bulk of the country’s deficit through spending cuts rather than heavy taxation, some tax cuts were still necessary.

The much-predicted VAT increase comes as little surprise. Luckily, food and children’s clothing, deemed everyday essentials, will continue to be exempt from VAT along with zero–rated items like newspapers and printed books. 

The Treasury estimates that this one measure will generate over £13 billion extra revenue by the end of the current parliament. 

However, increased VAT could reduce consumer demand according to Ian Mills, partner at James Cowper accountancy firm. He says: “If manufacturers and retailers decide to pass on these increases, the £13 billion expected to be raised over the next five years may quite quickly disappear.”

In her reply to the chancellor, Harriet Harman argued that the VAT rise will penalise the poor but tax expert and lecturer Sam Hart believes that the VAT hikes will hit retailers harder than the consumers. “Shops will need to charge consumers more. Where price is flexible, this will hit the customer, rich or poor, but where prices are tight, retailers may have to absorb some or all of the increase themselves, or pass the cost down the chain to their suppliers. If retailers, or their suppliers, are working on tight margins, this could be catastrophic for these businesses.”

Try our new VAT calculator to find out how much you will pay after the VAT rise on 4 January.

Other tax changes include:

Council tax 

Calling for all areas of government to keep costs down “when money is short”, Osborne promised to help local councils in return. 

The coalition government has pledged to help local councils in England if they wish to freeze council tax rates for one year from next April. 

The average family will be £35 better off a year from this freeze, according to the Treasury.

Insurance tax

From January next year, the standard rate of insurance premium tax (IPT) will increase from 5% to 6%, with the higher rate going up from 17.5% to 20%. This could affect insurance premiums on anything from motor insurance, home insurance to travel and private medical insurance.

Eric Galbraith, chief executive for the British Insurance Brokers Association (BIBA), argues that consumers and businesses will be hit by increasing insurance costs and may even discourage individuals from taking out adequate cover. 

“BIBA’s research last year demonstrated that businesses and consumers were reducing insurance cover as a result of the recession and we are concerned that increases to insurance premiums as a result of IPT could lead to even further underinsurance or even a lack of insurance protection. The last thing people need in a financial crisis is a higher insurance bill.”

National Insurance

Instead of excessively taxing businesses, Osborne argued in his speech that the government will make it cheaper for companies to employ people and help economic recovery.

From April 2011, the employers’ national insurance threshold will rise by £21 per week above indexation.

Osborne argues that “the cost of hiring people on incomes lower than £20,000 will be less than it is today,” and claims it will take 650,000 employees altogether out of this tax.


Following on from the previous government’s planned rises in the March budget, Osborne announced that there are to be no new increases on alcohol, tobacco or fuel but a report in the autumn will examine targeting alcohol duty on the products most associated with binge drinking. 

The chancellor also promised to examine the sharp oil price fluctuations to see if pump prices can be stabilised and see if a rebate for remote rural areas could work. 

In time to celebrate or commiserate the England football teams fortunes, Osborne also announced that the previous government’s planned 10% duty increase on cider will be revoked at the end of this month. 

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