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Lift the VAT threshold to £150,000

Reform UK · what the evidence says

An independent, source-checked look at Reform UK’s policy “Lift the VAT threshold to £150,000” — what it would actually do across the things that affect your life. Every claim below quotes the source behind it. How this works.

Tax & the money you keep — Helps

minor · moderate confidence

Raising the VAT threshold to £150,000 would let more small businesses avoid VAT registration costs, potentially allowing them to keep more revenue and offer lower prices — but the direct benefit to individual household take-home pay is indirect and the fiscal cost is over £2bn, which may have knock-on effects elsewhere.

The evidence

Biggest unknown: Whether the compliance-cost savings actually translate into higher retained income for affected business owners, or are offset by lost input-tax reclaim rights and competitive distortions.

Our reading: For O11 — tax and the money people keep — the relevant question is whether affected business owners and consumers see more money in their pockets. The mechanism is real: businesses whose turnover falls between £90,000 and £150,000 would no longer need to register for VAT, removing compliance costs (filing, record-keeping) and allowing them to price below VAT-registered rivals or retain more margin. The government's own estimate for the much smaller 2024 rise (£85k→£90k) was £5m/year and 28,000 fewer registrations; a rise to £150k would affect a far larger population (~320,000 firms per the policy's own figure), so the aggregate compliance saving is plausibly larger, though still diffuse across many small firms. For sole traders and owner-managers, avoiding VAT registration is a direct reduction in their tax-compliance burden and can increase retained earnings — a genuine O11 improvement. However, the magnitude is minor rather than moderate for several reasons. First, the gain is concentrated among a relatively small slice of businesses and is indirect for ordinary employees and consumers. Second, the £2bn+ fiscal cost (per the policy's own estimate) is not scored here but signals the scale of redistribution involved. Third, the bunching distortion may simply move upward rather than disappear, limiting the net efficiency and income gain. The direction is nonetheless 'improves' because the direct effect on those businesses — lower compliance costs, potential to retain more revenue — is a real money-in-pocket gain for affected owners, which is what O11 measures. The main caveat is that businesses losing VAT-registered status also lose the right to reclaim input VAT, which can offset savings for those with significant VAT-able inputs; this is not quantified in the provided evidence.

Public finances & the next generation — Hurts

moderate · moderate confidence

Raising the VAT threshold to £150,000 would cost the public finances an estimated £2 billion or more per year in lost revenue, with no funded replacement identified. This worsens the near-term fiscal position, though the exact size depends on how many businesses change behaviour.

The evidence

Biggest unknown: Whether the economic growth unlocked by removing the bunching disincentive would partially or fully offset the direct revenue loss — no independent model of this dynamic for the £150,000 level is cited in the evidence.

Our reading: The policy removes an estimated £2 billion+ per year in VAT revenue (Reform UK's own figure; OBR directional evidence corroborates the sign). No funded offset is stated or evidenced — the policy is framed purely as a relief from red tape. The UK threshold is already the highest in Europe and the OECD, so this is not correcting an outlier tightness; it moves further from the international norm in a direction that independent bodies (OBR, IFS, CIOT) associate with revenue loss and base narrowing. On the debt-path sustainability test that O12 requires, an unfunded ~£2bn annual reduction in receipts worsens the fiscal position. There is a theoretical offset: the bunching literature shows firms constrain growth to stay below the threshold, so a higher threshold could unlock some additional economic activity and partially recoup revenue. The OBR has documented this distortion (lost turnover of £350m in 2023 at the £85,000 level). However, no cited evidence models whether the growth effect at £150,000 would be large enough to offset the direct revenue cost, and the independent institutional consensus (IFS, CIOT, OBR direction-of-travel) leans toward the net fiscal effect being negative. The Northern Ireland complication adds implementation risk but does not materially alter the fiscal verdict. Magnitude is moderate rather than major because the £2bn figure is the policy's own estimate and independent verification at this specific threshold is absent, introducing some uncertainty about size — but the direction is clearly negative on the evidence provided.

Prosperity & living standards — Mixed picture

minor · moderate confidence

Raising the VAT threshold to £150,000 would reduce red tape for more small businesses and remove a distortion that actively slows firm growth near the current threshold, but it would also narrow the VAT base, cost over £2bn in revenue, and likely recreate the same bunching problem at a higher level — limiting any net gain to living standards and productivity.

The evidence

Biggest unknown: Whether raising the threshold resolves the bunching distortion at scale or simply shifts it higher — if bunching migrates to £150,000, the productivity gain is largely illusory and the fiscal cost remains real.

Our reading: This policy has genuine competing effects on O13. On the positive side, the bunching evidence is credible and institutional: the OBR and Warwick research both confirm that firms near the current threshold actively suppress turnover growth by 1–2 percentage points to avoid crossing it. Raising the threshold to £150,000 would remove this distortion for firms currently bunching just below £90,000, freeing them to invest and grow, which directly supports productivity and firm dynamism. The administrative burden reduction is also real — the 2024 rise to £90,000 demonstrably freed 28,000 micro-businesses from compliance costs, and a larger rise would scale this up. However, the countervailing effects are also evidence-backed. The revenue cost exceeds £2bn, which must be funded somehow (with O12 implications that feed back into O13 via public investment capacity). More importantly, the CIOT and IFS — both credible independent institutions — flag that a narrower VAT base is less efficient overall, and critics note the bunching distortion is likely to migrate to the new threshold rather than disappear. The FSB itself only recommended a rise to £100,000, not £150,000. The competitive distortion between VAT-registered and unregistered firms would also widen, potentially harming larger small businesses that must stay registered. Absent this policy, the bunching cost (£350m in lost turnover in 2023) would persist but the VAT base would remain broader and the fiscal position stronger. The additional gain from a £150,000 threshold over the existing £90,000 level is genuinely uncertain: some firms would grow through the old ceiling, but many may simply bunch at the new one instead. The net O13 effect is real but modest in both directions — hence mixed/minor.

Cost of living — Mixed picture

minor · moderate confidence

Raising the VAT threshold to £150,000 could let some small businesses charge lower prices, helping consumers — but it costs over £2bn in public revenue and mainly benefits business owners rather than shoppers directly. The net effect on ordinary people's cost of living is small and uncertain.

The evidence

Biggest unknown: Whether businesses freed from VAT actually pass savings on to consumers as lower prices, or simply pocket the margin.

Our reading: The policy's direct relevance to cost of living is indirect: it does not change tax thresholds or benefits for households, but it may marginally reduce prices for goods and services sold by newly exempted small businesses, since those firms no longer need to charge VAT. This is a real but limited channel — the price effect depends entirely on businesses passing savings through to consumers rather than retaining them as profit margin. On the downside, a £2bn-plus revenue cost could, depending on other fiscal choices, put pressure on public services or require other tax rises that squeeze household budgets. The bunching distortion is also projected to shift upward rather than disappear, limiting efficiency gains. The IFS and CIOT both caution against narrowing the VAT base further. The net cost-of-living effect for ordinary households is therefore modest at best: some may benefit from marginally lower prices at small local businesses, but the fiscal cost is large relative to the consumer benefit, and there is no direct income support or energy/food cost mechanism. The verdict is mixed but minor — a small potential consumer price benefit offset by a large fiscal cost with uncertain pass-through.

Good work & fair pay — Mixed picture

minor · moderate confidence

Raising the VAT threshold to £150,000 would cut red tape for up to 320,000 small firms, potentially freeing them to grow and hire — but it could also entrench a new 'bunching' distortion where businesses artificially cap turnover at the new limit, limiting job and wage growth.

The evidence

Biggest unknown: Whether firms freed from VAT compliance will genuinely grow and create better jobs, or whether most will simply bunch below the new £150,000 threshold and stagnate as before.

Our reading: For O4 — good work and fair pay — the key question is whether this policy improves the quality and security of work for ordinary people, particularly those employed by or running small businesses. On the positive side, the evidence shows that the current threshold actively distorts small business behaviour: firms deliberately suppress turnover and therefore growth to stay unregistered, with measurable effects on output (a 1–2 percentage point slowdown near the threshold, and £350m in lost turnover nationally). Removing or raising this ceiling could unshackle a substantial number of small employers — up to 320,000 by the policy's own estimate — allowing them to grow, hire more people, and potentially pay better. Reducing compliance burdens also frees up owner-operator time that could be redirected to productive activity. However, the same structural problem that exists at £90,000 is likely to re-emerge at £150,000. Critics and economists note the threshold simply relocates the bunching distortion upward, not eliminates it. For workers, this means firms may still cap growth just below the new limit, limiting job creation and wage growth at that new ceiling. The scale of distortion could even be larger given more firms operate in the £90k–£150k band. The net effect on O4 is therefore mixed: genuine relief from compliance costs and a real growth incentive for firms currently near or just below £90,000, but a shifted and potentially larger brake on growth for those who would now bunch at £150,000. The magnitude is minor-to-moderate for the firms directly affected but limited economy-wide given the fiscal cost and the structural critique from IFS, OBR, and CIOT that a narrower VAT base is economically inefficient.

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