From the 4th January 2011, the VAT rate in the UK increases from 17.5% to 20%. We explore the effects on your phone bill and your tariff and find out whether the price hike gives you a way out of your contract.

The rate of “Value Added Tax” increases from 17.5% to 20% in the UK on the 4th January 2011. There are going to be effects on a whole range of mobile products including phones, tariffs, call charges and application downloads. Some other products are exempt such as roaming charges outside the EU, mobile phone insurance and the purchase of products from outside the EU. We summarise everything you need to know.

What mobile products are VAT charged on?

VAT is charged on:

  • Mobile phones. If you buy a SIM-free/unlocked mobile phone or a mobile phone on a contract where there is an upfront cost, you’ll have to pay the higher-rate VAT on the upfront amount. You’d save money by buying the phone now before the VAT hike.
  • Airtime. Minutes, texts, internet… the whole lot. You’ll pay the higher-rate VAT on your monthly phone bill after the 4th January. This affects customers who begin their contract before the 4th January too so you won’t save any money on your monthly bill by purchasing now.
  • Ringtones, applications, etc. You’ll pay the higher-rate VAT on pretty much all other mobile related products such as downloads, applications and ringtones. You’ll save money buying these products now.

VAT isn’t charged on all mobile products – there are some notable exceptions. VAT isn’t charged on mobile phone insurance or any call charges incurred outside of the EU (e.g. international roaming charges). Also, anything you buy outside the UK isn’t subject to VAT (for example if you buy something from a website based in the US… other taxes may be due though).

How will prices change for Pay Monthly customers?

From the 4th January, you’ll find that your monthly phone bill increases by around 2.1% – not 2.5% as many people assume. To outline why, we need to look at the breakdown of charges.

A £10/month Pay Monthly tariff currently breaks down as follows:

Charge from your mobile network excluding VAT = £8.51
VAT charged on £8.51 at rate of 17.5% = £1.49
Total cost including VAT = £10.00

After the VAT increase from 20%, it’ll look like this:

Charge from your mobile network excluding VAT = £8.51
VAT charged on £8.51 at rate of 20% = £1.70
Total cost including VAT = £10.21

The change from £10/month to £10.21/month represents a price increase of 2.1%. In reality, your network operator may decide to round this figure the price to a nicer number such as £10.20/month. This would be achieved by reducing their own charge to £8.50 (you’d pay £1.70 in VAT on this amount giving a final figure of £10.20/month). Your network could even choose to absorb the entire VAT increase by cutting the price they charge to £8.33. You’d pay £1.67 VAT so in total: £10/month. None of the major UK operators have decided to absorb the VAT hike for Pay Monthly customers.

Assuming that your network passes on the entire VAT increase without rounding, your monthly phone bill will change as follows:

Monthly Price (until 3rd Jan 2011, 17.5% VAT rate) Monthly Price (after 4th Jan 2011, 20% VAT rate)
£5.00 £5.11
£10.00 £10.21
£15.00 £15.32
£20.00 £20.43
£25.00 £25.53
£30.00 £30.64
£35.00 £35.74
£40.00 £40.85
£45.00 £45.96
£50.00 £51.06
£60.00 £61.28
£75.00 £76.60

The charges for exceeding your monthly allowance will also change. For example, if it currently costs 30p/minute for calls outside your allowance, this will become 30.6p/minute. Note that if you regularly exceed your monthly allowance, we strongly recommend upgrading your tariff.

For many Pay Monthly customers, the cost of add-ons/bolt-ons/boosters will also increase. Vodafone have decided to absorb the VAT increase on add-ons whilst O2 are absorbing the VAT increase on bolt-ons until March.

How will prices change for Pay As You Go customers?

London Eye & Big Ben at sunset
Creative Commons License photo: Harshil.Shah

Whereas it is fairly easy to increase the price of a Pay Monthly contract by 2.1%, it is much more difficult to increase Pay As You Go call charges in the same way. For example, the cost of a call might go from 25p/minute to 25.5p/minute which presents some complications for billing. For this reason, most of the mobile networks have either frozen their Pay As You Go prices or increased other prices to compensate for the fact they have absorbed the VAT increase elsewhere. O2 customers will be seeing a 20% increase in the cost of sending a text message.

  • Three – TBC
  • Orange have frozen Pay As You Go call charges
  • O2 are increasing the cost of a text message from 10p to 12p (20% increase!)
  • T-Mobile are increasing the cost of a text message from 10p to 11p
  • Vodafone have frozen Pay As You Go call charges

How will business plans be affected?

There are no changes to business mobile phone tariffs. Business tariffs are billed excluding VAT.

Can I cancel/end my contract as my network is increasing the price?

No. Your network isn’t actually increasing the price it charges you – the only thing which changes is the amount of tax it collects from you on behalf of the Government. Even so, the chances are your contract has some kind of provision for small price increases in line with inflation.

Even if you tried to make the argument there is a price increase, the law makes a provision for increasing the cost of a contract in the case of a VAT increase. Section 89 of the Value Added Tax Act 1994 states:

Where, after the making of a contract for the supply of goods or services and before the goods or services are supplied, there is a change in the VAT charged on the supply, then, unless the contract otherwise provided, there shall be added to or deducted from the consideration for the supply an amount equal to the change.

This makes it incredibly unlikely you’d be able to use VAT increase as an excuse to terminate your contract early.

If you’re currently stuck mid-contract, remember that there are still ways to cut your phone bill within the scope of the contract. For example, you could downgrade or upgrade your mobile contract to a tariff which is more suitable for you. Combine these with our best-practice money saving tips and you could save yourself a fair bit of dosh without having to try and find a way to terminate your contract early.

If you’ve come to the end of your contract, you can usually save around £180/year by switching to a SIM only tariff. We’ve got a guide to the best value SIM-only tariffs and the best value SIM-only tariffs for smartphones.

How will my call charges be affected?

The major networks have all set up pages detailing the changes you’ll see in your bill:

Where can I find out more about the VAT increase?

You can read more about the VAT increase on the HM Revenue & Customs website (note that this is a fairly technical document mainly aimed at businesses).

Your Comments

We'd love to hear your thoughts and any questions you may have. You can add your own comment here.

Leave a Reply

Your e-mail address will never be published. By default, I'll use it to send you an update when there are replies to your comment. However, if you don't want to receive this, you can disable it using the dropdown menu below: