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VAT price rise – which numbers to trust?

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Image by wwarby via Flickr

VAT price rise kicked in yesterday – the potential cost to the average household bill is under the spotlight as politicians debate the impact of higher tax.

It has been described by some as ‘necessary’ and others as ‘regressive’ and cost estimates have varied from £158 per home per year to as much as almost £600, leading to widespread confusion over the real effect a 2.5% increase might have on our incomes.

So which figures are accurate and what are they based on? With costs rising across the board, many will be struggling to get a grasp on which numbers to trust as they grapple with budgeting for the New Year.

Here are some of the figures you may have seen in the headlines and what they actually refer to:

£1,600

Source: various charities

This is the figure that charities including Barnardo’s, Save the Children and Oxfam estimate many households will now pay in total VAT cost, claiming that a low-income family could spend as much as £1,600 per year on their VAT bill. Save the Children says that this figure is based on official Office for National statistics data which suggests that the bottom 20% of households will be paying a higher VAT bill.

However, this is an average weighted estimation, meaning that it takes in to account a large range of homes, including large families on low incomes and therefore may not be applicable to those with smaller annual VAT bills.

£561/ ‘nearly £600’ increase

Source: Deloitte

Figures released by the accounting firm Deloitte have revealed that a family earning a total income of £70,000 will pay an extra £10.80 per week equalling £561 per year.

However, many households in the UK will struggle to make up this kind of annual income so its relevance is dependent on your personal circumstance.

£520 increase

Source: Kelkoo

According to the independent study, commissioned by price comparison website Kelkoo, the increase of 2.5% in VAT will cost £212 per person or £520 per household per year.

This is an updated figure from the original study, which took place in April 2010 and estimated a figure of £425 per household per year.

£389 increase

Source: politicians

Making quite a few headlines was the estimation that the VAT hike would put up household spending by £359 per year.

Labour leader Ed Miliband was careful to announce that this figure was originally featured on a Lib Dem election poster, warning of a Tory VAT ‘bombshell’ of £389 additions to bills per household.

There doesn’t as yet seem to be any clear source on how this figure was calculated, however, this Lib Dem figure was based on the projection that the Conservative government would raise VAT  by 3%, not 2.5%, which it did not. Therefore, this figure at these calculations would be reduced to £324.

£158 (£7.50) increase

Source: uSwitch

uSwitch predicted that the VAT increase would add an extra £158 per household per year.

This figure is based on household essentials only, calculating annual increases from the tax rise in comparison with the typical monthly household spend, as explained in the table below.

Bill Typical monthly household spend December 2010 


Typical monthly household spend January 2011 Annual increase from tax rise
Food £100 £102.75 £33
Gas & electricity £103 £103 £0
Water £30.08 £30.08 £0
Phone/broadband/TV bundle £33.36 £34.19 £10
Mobile phones £84.75 £86.88 £25.43
Buildings insurance* £17.42 £17.59 £2.09
Contents insurance* £9.25 £9.34 £1.11
Car insurance* £104.14 £105.18 £12.50
Petrol £245.37 £251.50 £73.61
 

Total

£157.74

  • drdlloyd

    I thought the Vat increase would be 2.5% but my recent gas bill shows that the Vat has increased by 15%. This could lead to many people paying an extra £60 on their winter gas bills.

    • Lauren Pope

      VAT on gas and electricity has not increased – it has stayed at 5%. So there’s no need to worry about the VAT increase affecting your gas and electricity bills. The prices rise you’re seeing on your bill must be down to something else.

  • Joseph Flynn

    I have studied the U-Switch figures and while I understand them to be average figures My wife and I are both pensioners and have one diesel car, we don’t smoke and drink only occasionally. We have calculated our net annual increase to be in the region of £100 and at this stage we do not know by how much our pensions (Both state and private) will rise.

  • John R

    To LLOYD

    He is taken. No Vat on Gas or Elec.is levied king at his increased useage !!!
    Anyway to wortk the increase, you have to take off the 17.5% element to get to the basic gross price and then add the 20%. It is not just an ‘add 2.5%

  • Rodney Tulloch

    The Kelkoo figures quoted must be wrong. How can £212 a head a day come to £520 per household per year? And if £212 is 2 1/2 %, the average individual spends £8480 (before VAT) every day!

    • Lauren Pope

      Whoops, we had a little typo there! This has now been corrected – thanks for drawing it to my attention.

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