- VAT on domestic electricity will fall from 5% to zero from 1 October, reducing the annualised Ofgem price cap by about £45.
- The £850 million measure is funded only until the end of the current financial year, using money assigned to the cancelled digital ID programme.
- Targeting electricity rather than gas modestly improves the economics of heat pumps and electrification, but it is not a structural reform of energy pricing.
Prime Minister Andy Burnham has announced the removal of VAT from household electricity bills from October in his first major cost-of-living intervention, offering limited winter relief while leaving the policy’s longer-term future for the Budget.
The government estimates that dropping VAT from 5% to zero will take about £45 from the annualised Ofgem price cap. Suppliers will be expected to pass on the reduction to customers on fixed tariffs as well as those covered by the price cap. Eligible charities, care homes and small organisations receiving domestic energy VAT relief will also benefit.
Comparable funding will be made available to Northern Ireland, where household tariffs are not governed by Ofgem’s Great Britain price cap.
The policy is expected to cost £850 million during 2026-27 and will be funded through the cancellation of the previous government’s £1.8 billion digital identity programme. However, Downing Street has authorised and funded the VAT cut only for the remainder of this financial year; decisions about extending it beyond April will be made alongside an Office for Budget Responsibility forecast.
That qualification makes the £45 figure easy to misread. It is the reduction in an annualised price cap calculation, not necessarily the cash saving that every household will receive before April. Actual savings will depend on electricity consumption and whether the exemption is extended, although disproportionately high winter usage should bring forward a larger share of the benefit.
The measure comes after Ofgem increased energy prices by 13% for a typical dual-fuel household from July. Electricity under the current cap averages 26.11p/kWh and gas 7.33p/kWh, both including VAT. The Commons Library said July’s gas unit price was 28% higher than in the previous quarter after wholesale markets responded to the Middle East conflict. Typical bills remain 53% above their winter 2021-22 level.
Token gesture?
Removing tax only from electricity carries a transition policy logic as well as a cost-of-living one. Britain has one of Europe’s least favourable ratios between household electricity and gas prices, which weakens the running-cost case for heat pumps despite their greater efficiency.
The policy is also universal rather than targeted. Higher-consuming households will receive a larger cash benefit, while people with large gas heating bills gain only indirectly. For households already facing energy debt, £45 from an annualised bill is unlikely to change affordability materially.
Its larger significance is the precedent of treating electricity and gas differently. Successive governments have acknowledged that loading policy costs onto electricity discourages electrification, but permanent rebalancing has proved politically difficult because it risks raising gas bills.
Burnham has taken a modest first step without confronting that critical trade-off. The Budget will show whether the move becomes part of a durable electricity pricing strategy or remains a six-month response to another fossil fuel price shock.
