VAT - What's that?

You may have heard the term VAT but do you know what it means?

VAT, or Value Added Tax, is a tax on most goods and services provided by registered companies in the UK.  Our government collects VAT from the seller (the business) rather than the customer even though it is the customer who ultimately pays the VAT.

The standard rate of VAT is currently 20%.  This means if you buy a DVD that costs £10 then £2 of that money goes to the government as VAT.  Although 20% is the standard rate there are many things that have a reduced rate of VAT, are Zero Rated or are exempt from VAT.

Here are a selection of items in each VAT bracket.

Standard VAT (20%)
Chocolate, electrical goods, ice cream, crisps, petrol, hot take-away food and stationary.

Reduced Rate VAT (5%)
Children's car seats, electricity, gas, heating oil and solid fuel (coal).

Zero Rate VAT (0%)
Cycle helmets, biscuits (not chocolate covered), books (not ebooks), cereals, eggs and milk.

Exempt from VAT
Antiques, TV licence, postage stamps, membership subscriptions and lottery tickets.


Wait I'm confused, what is the difference between Zero Rate VAT and VAT Exemption?
If a business sells goods that qualify for Zero Rate VAT the company themselves can recover VAT on their costs.  This means they can expect a repayment each month from the government.

If exempt goods are sold no VAT can be reclaimed on any costs the company may have paid.

Things could be more confusing!
Although this might all seem hard work at least you know when you go into a shop that the DVD you want to buy is £10 because that is what it says on the price tag.  There are some countries that charge tax but you have to work out for yourself how much it will cost.

For example, if you wanted to buy a DVD in Canada the price tag might say C$10 but at the till you would actually have to pay a 13% Goods and Services Tax (GST) so the final cost would be C$11 and 30 cents.

It is easy enough working out the tax on one item but can you imagine have a shopping basket full of things and having to work out if you have enough money?

Pensions Explained

'Pensions, aren't they for old people'

The word Pension means a regular payment made during a person's retirement. So, in a sense pensions are for old people.

BUT...
The sooner a person starts contributing towards their pension the more money they will receive when they retire.  Private pensions are something you really need to consider as soon as you start earning money

All through your working life, a proportion of your income is paid to the government as tax. We have already seen that the taxes collected are used to pay for things like schools, hospitals and the police force, and a proportion of the tax is paid out to retired people as old age pension.

The age at which you can claim your old age pension is currently 65 for men, and 60 for women, but this is changing. If your were born after 1968, then the chances are you wont get your old age pension until you are 68 (for both men and women).

One of the reasons for this, is that people are living longer. This means that where they only used to live for 18-20 years after retiring, most now live for 28-30, which means the money the government pays out has to last longer and longer. There are also fewer people in work, and therefore fewer people paying tax into the pot for the government to use.

The standard amount of  money you get when you retire is also getting less and less, and this is one of the reasons that it is never too early to start thinking about saving for retirement with a private pension. Just imagine having to work until 68, and then not even getting enough pension money to live on.

It makes sense to think about long term savings as soon as you can, as most people look at retirement as the time to relax and enjoy the fact they don't have to go to work anymore, not worrying if they have enough money to buy the basic things in life.