The news that Prime Minister Andy Burnham has announced a 5% cut in Value Added Tax (VAT) on electricity bills comes as a welcome respite to households facing soaring energy costs. From 1 October 2026, the VAT on electricity will drop from 5% to zero, aligning with Ofgem's new price cap aimed at protecting consumers during the winter months when energy consumption typically peaks.
The government estimates that a typical household could save around £45 on their annual energy costs as a result of this move. However, individual savings will vary depending on electricity usage – those who rely heavily on electricity for heating or have electric vehicles and heat pumps will see bigger reductions in their bills.
While the VAT cut is designed to provide broad relief, the Institute for Fiscal Studies (IFS) has raised concerns about its effectiveness. The think tank notes that gas prices have surged by 24% since the Iran war began, far outstripping electricity price increases of 5%. This disparity raises questions about whether the policy is targeting households most affected by the energy price implications of the conflict – particularly those on low incomes who predominantly use gas for heating.
For residents in Northern Ireland, however, this measure won't apply due to post-Brexit regulations. Instead, the government has pledged £20 million in funding to support Stormont's own cost-of-living measures for people living there. Energy providers will automatically adjust bills for all customers in Great Britain – including those on fixed-rate tariffs – removing the 5% VAT from unit and standing charges.
Charities like National Energy Action have cautiously welcomed the VAT cut, but stress that it's just a step towards addressing record levels of energy debt. According to Energy UK, households collectively owe providers £5.5 billion. National Debtline highlights energy debt as their second most common issue, suggesting more comprehensive support is needed for those struggling with arrears.