VAT on domestic electricity bills is being scrapped, dropping from 5% to 0% for six months, Prime Minister Andy Burnham has confirmed, in one of his first policy announcements since taking office.
The change takes effect from 1 October 2026 and is expected to save a typical household around £45 a year, though a forecast rise in the Ofgem price cap on the same day means many households may barely notice the difference.
At a glance:
- VAT on electricity cut from 5% to 0%, from 1 October 2026 to 31 March 2027
- Estimated saving: around £45 a year in rate terms, or roughly £25 over the six months the cut actually runs — the difference is because electricity use is higher in winter, per the IFS
- Expected to cost the Treasury around £850 million in 2026 to 2027, funded by cancelling the planned Digital ID programme
- Ofgem’s price cap is separately forecast to rise by about 3.1% from 1 October, which could cancel out much of the saving
Burnham’s first act as Prime Minister
Andy Burnham became Prime Minister on 20 July 2026, and the VAT cut was announced the following day as one of his first acts in office, alongside new Chancellor John Healey.
Announcing the move, Burnham said the government was taking immediate action to cut taxes on energy bills, in order to “put more money in people’s pockets and bring back hope.”
The Conservative leader, Kemi Badenoch, criticised the funding behind the move, saying “you can’t use the funding from an unfunded programme to pay for cheaper bills,” and suggested ministers instead pursue North Sea drilling and scrap net-zero commitments.
ITV News also reported that the cancelled Digital ID scheme was expected to cost around £600 million this year, leaving a shortfall of roughly £250 million against the £850 million needed — a gap the government says will be covered by wider budget reprioritisation.
How the VAT cut on electricity bills works
VAT is charged on top of the pre-tax price of electricity, so scrapping a 5% rate doesn’t cut the final bill by a full 5%. Because the 5% was calculated on the amount before tax, removing it reduces the total bill by about 4.8% (5 divided by 105) once VAT drops to zero.
The reduction applies to both unit rates and standing charges.
Suppliers are expected to pass the saving on to all domestic customers, including those on fixed-price tariffs, in the same way the £150 reduction from the last Budget was applied. Households shouldn’t need to do anything — the change is expected to be applied automatically to bills from October.
The catch: a price cap rise on the same day
Around 60% of households in England, Scotland and Wales are on a standard variable tariff governed by the Ofgem price cap, which is reviewed every three months and happens to move again on 1 October — the same day the VAT cut begins.
The current prediction is a rise of about 3.1% on both gas and electricity, equivalent to roughly £50 a year, or about £25 over the same six-month window as the VAT cut.
MoneySavingExpert.com founder Martin Lewis, analysing the announcement, said that once the price cap rise is factored in, the net saving over the first six months looks closer to £20 than the headline £45, and cautioned that “no one is really going to feel very much change in their pocket from this.” He also noted the price cap is separately predicted to rise again in January, which could erase the remaining benefit.
It’s also worth noting that gas is not included in the cut — only electricity. Dual-fuel households should only see the reduction applied to the electricity portion of their bill.
Not everyone thinks it’s well targeted
The Institute for Fiscal Studies (IFS), responding on the day of the announcement, was more critical than most. IFS director Helen Miller argued the cut is “not well targeted,” since the electricity price cap has risen only around 5% since the war in Iran began, compared with a 24% rise in the gas price cap — the fuel this VAT cut doesn’t touch.
The IFS also pointed out the saving is regressive in cash terms: poorer households spend a larger share of their income on electricity, but richer households, who tend to use more of it overall, stand to receive the bigger cash saving.
On funding, the IFS noted that the Office for Budget Responsibility’s own estimate put the cost of the cancelled Digital ID programme at £1.8 billion cumulatively across three years, not this year alone — meaning the full £850 million needed this year remains, by the IFS’s account, unspecified savings from elsewhere in the budget, rather than money directly freed up by scrapping the scheme.
Notably, the IFS’s own modelling — comparing the VAT cut only against the smaller rise it had separately forecast for the electricity portion of the price cap before this announcement — puts the net benefit at around £20 over six months, in the same range as Martin Lewis’s estimate above, despite starting from different figures.
Who else benefits
Small businesses that qualify for domestic energy VAT relief and are not VAT-registered should also see their electricity VAT drop to zero, as should eligible charities and residential care homes on reduced-rate energy, according to the government’s announcement.
Home EV charging becomes marginally cheaper too, since the 5% VAT rate on domestic electricity used for charging falls to zero, while the 20% VAT rate on public charging points is unaffected.
Industry estimates suggest a full charge of a typical 100kWh battery could fall by around £1, with heavier home-charging users saving more over a year — though drivers without off-street parking, who rely on public chargers, won’t see any benefit from this particular change.
Northern Ireland: a different route
The VAT cut does not apply directly in Northern Ireland. Under the post-Brexit Windsor Framework, EU VAT rules still apply to goods in Northern Ireland, including electricity, so implementing a UK-wide zero rate there would need separate EU agreement.
Instead, the Northern Ireland Executive will receive equivalent funding to support households in a similar way, though further detail on exactly how that will work had not been confirmed at the time of the announcement.
What it means for your electricity bill
If you pay a household electricity bill, here’s what’s worth checking before winter.
- Check your bill from October — the VAT reduction should appear automatically, including if you’re on a fixed tariff, so you shouldn’t need to contact your supplier.
- Compare fixed deals before winter — switching to a cheaper fixed tariff could save considerably more than the VAT cut alone. Uswitch put the gap between the cheapest deal and the July price cap at around £209 for a typical dual-fuel household as of 21 July 2026, though this changes as wholesale prices move.
If you run a small business, charity or care home, it’s worth checking with your energy supplier whether you qualify for reduced-rate electricity and that you’re on the correct VAT rate from October.
Check what other support you might be eligible for, including the Warm Home Discount, Cold Weather Payments and the Winter Fuel Payment, alongside the VAT cut.
Key Takeaways
- VAT on electricity drops from 5% to 0% for six months, from 1 October 2026 to 31 March 2027, one of Andy Burnham’s first acts as Prime Minister
- The cut is expected to save a typical household around £45 a year, but a forecast 3.1% rise in the Ofgem price cap on the same day, and the fact that gas isn’t included, mean many households should see far less of a difference
- No action is needed: suppliers are expected to apply the reduction automatically, including for customers on fixed tariffs
- Small businesses, charities and care homes eligible for reduced-rate energy also benefit, as do home EV chargers
- Northern Ireland won’t see the VAT cut directly because of post-Brexit VAT rules, but the NI Executive will receive equivalent funding
- The IFS has criticised the cut as poorly targeted and regressive in cash terms, and says most of its funding is still unspecified rather than genuinely freed up by cancelling Digital ID
Written by:
Tax Rebate Services Editorial Team
Reviewed by:
Tony Shanks
,
qualified Taxation Technician (ATT)
Last updated:
This article provides general information and is correct as at the date shown. It isn't personalised tax advice — for help with your own circumstances, speak to a qualified adviser or HMRC.
