Why the 2.5% VAT Cut Might Not Help You Much

Alistair Darling has lowered value added tax to the lowest level that the EU law allows. Value added tax is now 15 per cent, which is 2.5 per cent lower than what it was. This alone could help the average British family save £10 a week, though the saving might be offset by the increase in alcohol, tobacco and fuel duty. However, this should equal a £12.5 billion injection into the economy.

This cut is a temporary one: it will last until the end of 2009 only.

Mr Darling announced the cut in his pre-Budget report on 24 November. The report has already angered Conservatives: they are calling Mr Darling a gambler who doesn’t want to give up. However, Chancellor Alistair Darling believes the cut should encourage consumer spending: it could mean consumers receive 12.5 billion pounds back in their pockets.

The government wants retailers to pass on the saving to consumers by offering price reductions. Retailers such as Currys, PC World and Dixons, as well as Marks and Spencer are planning to cut their prices and increase consumer confidence. However, basic groceries are not liable to VAT so the average Christmas dinner will not be any cheaper this year.

The government is planning to cut VAT, boost tax allowances and offer more cash to parents and pensioners.

What the pre-Budget means for you:

  • VAT is reduced from 17.5 to 15 per cent until the end of 2009.
  • Those earning more than £150 000 a year will be taxed at 45 per cent from 2011.
  • Motorways, social housing and schools receive £3 billion.
  • The rise in corporation tax has been postponed.
  • National Insurance rates increase by 0.5 per cent from 2011.
  • Pensioners’ credits are increased and they also get a £60 bonus this Christmas.
  • Air passenger duty will be replaced by new system and long-haul passengers pay more.
  • Child benefit credits increase in January, which is three months earlier than expected.
  • Taxpayers receive a £145 rebate as compensation for scrapping 10p tax band from April 2009.