Prime Minister Andy Burnham has announced the removal of VAT on household electricity bills from 1 October, describing the measure as an immediate step to ease pressure on families
facing rising living costs.
The tax cut, one of Burnham's first decisions after entering Downing Street, will reduce VAT on domestic electricity from 5% to 0% for the current financial year. The government says the measure will be funded by cancelling the planned £1.8bn Digital ID programme.
Ministers estimate the change will cut around £45 from the annual energy bill under Ofgem's price cap from October. It comes on top of the £150 reduction in bills announced in the previous Budget.
Speaking on his second day in office, Mr Burnham said his government was acting quickly to "put more money in people's pockets" after promising in his first speech as prime minister to give households "breathing space".
He said families had struggled with the cost of living for too long and pledged that his government would begin delivering practical support immediately.
The Treasury said the VAT reduction would apply throughout the current financial year, with any longer-term support to be considered in the autumn Budget alongside updated forecasts from the Office for Budget Responsibility. Ministers said any future measures would comply with the government's fiscal rules.
The estimated cost of the tax cut is around £850m in the 2026-27 financial year, based on current electricity prices. The government said savings from cancelling the Digital ID programme would cover the cost this year.
Chancellor John Healey said the measure would provide reassurance for households ahead of winter while also helping to reduce inflation.
The Treasury estimates the VAT cut will lower CPI inflation by about 0.1 percentage points and RPI by around 0.14 percentage points.
Energy suppliers are expected to pass the full VAT reduction on to customers, including those on fixed tariffs. The government said small businesses receiving domestic-rate energy supplies, charities and eligible residential care homes would also benefit.
Ministers said higher energy prices following Russia's invasion of Ukraine, together with recent instability linked to the conflict involving Iran, had continued to drive up household costs.
The announcement does not automatically extend to Northern Ireland because EU VAT rules continue to apply there under post-Brexit arrangements. Instead, the UK government said it would provide equivalent funding to the Northern Ireland Executive so households receive comparable support. Photo by [2], Wikimedia commons.
