Chancellor George Osborne has raised VAT from 17.5% to 20% in his emergency Budget today.
The Chancellor said the rise will come in on 4 January 2011, with exemptions for items such as food, childrens clothes, newspapers and books.
This will create £13bn in extra revenues for the year, the Chancellor said.
The hike in VAT was widely expected as part of the coalitions' plans to introduce a "tough but fair" Budget.
"This is the unavoidable Budget," said Osborne introducing his first Budget. "I'll not hide hard choices from British people or bury them in the small print."
He added the country's problems did not stem from under-taxing but from over-spending.
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From 1 March