The rise comes as a further blow to millions of people who are already struggling to cope with soaring living costs.
According to the AA, the average family of four will spend an extra £100 this year on petrol, while separate research by the Daily Telegraph found that energy bills will rise by £161 and the cost of food by £230 for the same family.
And any increase in interest rates will also have a significant impact on millions of homeowners. Predicted rises could add a further £562 a year onto the cost of the average £150,000 variable rate mortgage, according to the Daily Telegraph.
But it’s not all doom and gloom, as there are plenty of steps savvy consumers can take to reduce their outgoings. We explain what you can do...
VAT isn’t charged at 20% on everything, so it pays to know which items are exempt or are charged VAT at a lower rate.
For example, a ‘reduced rate’ of 5% applies to necessary goods and services such as gas and electricity for your home, children’s car seats and mobility equipment for the elderly.
Other items, such as books, newspapers, children’s clothing and equipment for people with disabilities are ‘zero-rated’, which means you won’t pay any VAT at all.
That means when it comes to buying birthday presents for children, for example, you should consider clothes and books rather than VAT-loaded ‘luxury’ toys.
With food shopping, things get more complicated. Staple foods, such as meat, poultry and fruit and vegetables, are zero-rated – although you will pay VAT at the standard rate of 20% on other products you may deem equally necessary, such as toothpaste and cleaning products.
Equally confusing is that while VAT is payable on ‘luxury’ items such as sweets and snacks, items such as milkshakes, chocolate spread and tortilla chips are all zero-rated.
One of the most famous irregularities in the VAT system is that of Jaffa Cakes. Their manufacturer, McVities, went to a tribunal court to determine whether the products were classed as cakes (which are VAT-exempt) or luxury biscuits (which are not). McVities insisted they were small cakes and eventually the tribunal ruled in the company’s favour.
While it might not save you a fortune, opting for foods that are zero-rated can help reduce the impact of the hike. You can find more information on which items are exempt or zero-rated at the HMRC website.
Compare shopping prices
As well as making sure you know the different VAT rates, make sure you shop as cheaply as possible. For example, compare prices of supermarkets’ groceries and products on shopping comparison website, Mysupermarket.co.uk.
Find the cheapest petrol station
While it’s clearly a false economy to drive too far to the cheapest petrol station, you can compare the cost of fuel in your local area before you set off by typing your postcode into Petrolprices.com.
Prices across the UK range from 119.9p a litre to 137.9p according to the website, so making a habit of using the cheapest forecourts can help reduce the effect of the VAT increase.
Take advantage of vouchers
January is always the leanest month of the year, so what better time to start using online vouchers to keep shopping bills down? You won’t be alone. Research last year by moneysupermarket.com found that Brits now redeem more than 2.4million discounts every day – a 25% rise on the previous year.
It also found that regular voucher-users save themselves an average of £660 a year which is not to be sniffed at.
Look out for special offers from retailers
Savvy retailers look for any opportunity to stand out from their competitors and, for many, this will now mean pledging not to pass on the VAT increase.
Keep your eyes peeled for offers like this – especially on more expensive items such as cars, where the 2.5% rise in VAT will hurt the most.
Use a cashback credit card
Whatever you buy, if you tend to pay with a credit card and clear the balance every month, consider switching to a cashback card. This means you will earn money as you spend which could not only negate this month’s VAT hike – but put extra in your pocket.
The current leader in the cashback credit card stakes is the American Express Platinum Cashback, which pays 5% on spending up to £2,000 in the first three months. This would translate into £100 if you spent to that maximum.
After this point, cardholders will earn up to 1.25%, depending on how much they spend. However, bear in mind the typical (APR) is a hefty 19.9%, which would soon eat away your cashback benefit if you failed to repay your balance.
Switch to a fix
If you are on a variable rate mortgage and worried about your monthly repayments rising with interest rates, consider switching to a fixed rate deal now while they are still cheap.
If you have 35% equity in your home, First Direct is offering a two-year deal priced at just 2.69% with a £999 fee. Bear in mind, however, if you are tied into your current mortgage, you will need to factor any early repayment charges into what you save.