From the start of next year almost everything you buy is going to get more expensive. Here's how to buffer the impact of the VAT increase on your spending power.
On the 4th January, 2011 the standard rate of VAT is going to increase from 17.5% to 20% so almost everything you pay out for is going to go up in price - all at once.
There are exceptions. Your gas and electricity bills won't be affected and neither will your water bill, most food, children's clothing and any other goods and services that fall within HMRC's reduced rate (5% VAT) and zero rate (0% VAT) categories (you can find a full list of reduced and zero rated items on the HMRC website).
However, everything else is suddenly going to get more expensive - from your broadband and mobile bills to the cost of filling up your car - so it's important to be prepared.
What difference will it make?
Practically the VAT increase means that your spending power will be reduced by 2.5%. So something that would cost you £100 if you bought it today, will cost you £102.10 from 4th January.
While that doesn't sound like a particularly dramatic increase, it's going to be applied almost across the board so you will notice the difference.
It's likely that any company you pay for services with will write to notify you how much more you're going to have to pay after 4th January. Take care to read the information they send in full as they may sneak in other changes to terms and conditions at the same time.
However, to work out post-VAT pricing yourself you just need to multiply the current cost by 1.021 (120/117.5). The resulting figure will be the amount you'll pay in January.
How can I beat the VAT hike?
In the long run your options are limited. The 20% rate has been introduced as a permanent measure so it's here to stay for the foreseeable future. Unfortunately this means you're going to feel its effects one way or another at some point.
However, in the short term it's possible to cushion its impact on your finances by carefully planning your spending over the next couple of weeks.
1. Make big purchases
If you are planning to make a big purchase, and have the funds available, it's a good idea to do it before 4th January. This way you'll only pay VAT at the 17.5% rate, even if your goods aren't delivered until the new year (although it does have to be within 6 months).
2. Put down deposits
If you can't afford to pay out the full amount for a big ticket item before the 20% rate kicks in, it's a good idea to put as much as you can down as a deposit (providing you'll be able to comfortably settle the balance later on). You'll only be charged 17.5% VAT on anything you pay before the rise kicks in but 20% on anything you pay after.
3. Plan your shopping
Make the most of the early January sales and do your shopping at the very start of the New Year before the 20% rise takes effect. This way you'll still benefit from sale prices without paying the extra tax.
4. Switch and save
The best way to cope with the impending rise in prices is to make sure you're getting the best deal possible on everything you pay for. This means comparing prices and switching suppliers, double checking the interest rates on your savings and/or loans and credit cards to see if you could get a better deal elsewhere and making smart choices when it comes to spending your money.
Our Action Plans give you step-by-step action plans for almost anything you want to save money on so take a look and find out where you can get the extra money the tax man is taking back.
