We all know that the rate of VAT will be increased on 4th January 2011, from 17.5% to 20%.
What we don’t all know, however, is how that will affect us, which is why you are reading this article! In this article, we will explain how the VAT increase will affect UK households.
Impact on consumers: A VAT increase to 20% would, on average, cost each of the UK’s 26.2 million households an extra £1.16 per day, or £425 a year! It would also reduce spending power by an average of 1.25% per annum, and will increase the VAT bill by 13.9%.
Impact on retail: The retail industry employs 3 million people, and accounts for 25% of national GDP – a slowdown in the sector could lead to a further 0.5% decline in economic growth over a twelve month period.
Benefit to Government: A 2.5% VAT rise would generate an additional £11.4bn for the Treasury, bringing total receipts from the tax to £91.29bn from £80.15bn.
Hike in price of everyday goods: A VAT increase will see cost of petrol rise by around 2.5p per litre, cigarettes by 12p per pack, and a pint of lager or a glass of wine increasing by, on average, 7p.
Impact on lower-income groups:
- The impact of a change in VAT would hit lower income groups most severely, given that they tend to pay above average levels of VAT as an indirect tax on spending.
- During the last fiscal year, the lower income groups paid 28% of their gross income in indirect taxes, with VAT payments representing more than 12% of their disposable income. This compares to the average household in the UK which paid 14% of their gross income in indirect taxes, and 7.4% on VAT.
- High income earners paid 10% of their gross income in indirect taxation and VAT represented 5.9% of their disposable income. However, to put it into context, the higherest earners still paid 175% more in VAT that the lower earners (£6.6bn compared to £2.4bn).
A rise in VAT would also bring us in line with other European countries’ sales taxes, with the average across the continent being 21.3%.
What do you think about the rise in VAT? Will it help, or hinder the economic growth of our country?
