The Government is to raise VAT from 17.5% to 20% from 4 January

The chancellor of the Exchequer, George Osborne, announced today: Years of debt and spending have made this unavoidable but it will generate £13 billion by the end of this parliament.

Graham Morgan, partner at Kingston Smith, added: When the Government raised income tax for high earners, it could not raise much revenue from it as there is not very many of them. This method will raise a fair amount of tax.

But commenting on the proposed hikes, Matt Duffy, partnerships manager at employee benefits consultancy Lorica, said: The VAT change means it is absolutely vital for employers to communicate their benefit schemes. Voluntary discounts will make all the difference to staff and they will really appreciate the savings.

And Clive Fathers, partner and head of the employment solutions team at Grant Thornton, added: This is a fine balancing act for employers. It could lead employees to want larger pay settlements, rather than wanting more from benefit schemes.

But with pay frozen in the public sector and with budgets cuts, this could prove a problem for HR.

Fathers added: Employers need to negotiate with employees to attempt to help them.