VAT rises to 20%

Chancellor George Osborne has announced a VAT hike to 20 per cent in a Budget packed with spending cuts and tax rises.

The move will cost the typical household an average of £1.16 a day or £425 a year, and reduce their spending power by around 1.25 per cent a year, according to comparison website Kelkoo.

It will add about 2.5p to a litre of petrol and 7p to a pint of lager, while big ticket items, such as a Ford Focus, which would previously have sold for £17,945, would be £383 more expensive.

The increase will also hit those on lower incomes the hardest, as they spend a higher proportion of their money on indirect taxes.

During the past year the poorest fifth of households spent an average of 12 per cent of their disposable income on VAT, compared with just 5.9 per cent for the richest fifth of households

The VAT hike will bring the UK more in line with the rest of Europe, while it would raise an additional £11.4 billion for the Treasury, bringing the total tax take from VAT to £91.29 billion. The UK currently has the lowest standard rate of VAT of any major EU state, and it is the only one to have a 0 per cent rate on food.