VAT will rise to 20% from next year – but will not apply to food, following today’s emergency Budget.

In a move the chancellor said would generate up to £13bn a year for the Treasury, VAT will increase from next January. But fears that the tax would be applied to groceries proved unfounded.

In a surprise move, the government revealed it would not increase duty on alcohol or tobacco. Labour plans to increase duty on cider have also been scrapped by the coalition.

During his budget speech, George Osborne said reducing the bulk of the deficit would come primarily from lower spending rather than higher taxes.

Corporation tax will be cut by 1% per year for the next four years, down to 24% by 2015. Personal income tax allowance is to be increased by £1,000 in April to £7,475.

New businesses set up outside London, the southeast and east of England will be exempt from £5,000 of National Insurance contributions for each of first 10 employees they hire, the chancellor added.

British Retail Consortium director general Stephen Robertson warned that the hike in VAT could result in job losses in retail. But he accepted that the government had “no easy options”.

“It’s some consolation that the range of VAT-able products isn’t being extended,” Robertson said. “The [January] start date will be difficult but retailers would rather have more notice than less. Six months to prepare is better than the rise coming in this summer.”

The British Beer & Pub Association welcomed the decision to freeze duty on alcohol.

“A beer tax freeze will help the sector’s ability to play its part in contributing to much-needed economic growth and generating valuable private sector jobs,” said BBPA chief executive Brigid Simmonds.

She said the rise in VAT was “not welcome but understandable”.

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