VAT will rise from 17.5% to 20% in January, the Chancellor revealed this afternoon.

Items such as food and children's clothing will continue to be exempt from VAT.

The Government says the increase will raise 13.5 billion a year by 2014/15. An item that currently costs 100 that is subject to VAT will cost 102.13 next year.

Some estimates have suggested the hike will cost households around 500 a year.

The tax is paid for by retailers on the majority of goods sold but is usually passed onto consumers.

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VAT to rise