The cost of living crisis has been a persistent thorn in the side of many families across the UK, and Prime Minister Andy Burnham has taken a crucial step towards alleviating some of that pressure. From 1 October 2026, households will no longer have to pay Value Added Tax (VAT) on their electricity bills, thanks to a swift decision from the new PM.
This significant move is expected to lead to an approximate £45 reduction in the annual Ofgem price cap, building on previous measures that removed £150 from bills at the last Budget. For households struggling to make ends meet, this could be a much-needed lifeline as winter approaches. The government projects this will also have a modest but positive impact on inflation, potentially decreasing the Consumer Price Index (CPI) by around 0.10 percentage points.
The funding for this VAT cut is being met by cancelling the Digital ID programme, which was projected to cost £1.8 billion over the next three years. Chancellor John Healey MP has confirmed that this approach ensures the measure is funded responsibly and helps to manage inflationary pressures while supporting families across the country. Further long-term measures will be detailed in the upcoming Budget, subject to an Office for Budget Responsibility (OBR) forecast and adherence to government fiscal rules.
Prime Minister Burnham has pledged to give people 'breathing space', stating that this immediate action on electricity bills is intended to 'put more money in people's pockets and bring back hope'. The government expects all electricity suppliers to pass on the full VAT reduction to their customers, including those on fixed tariffs. This move also extends benefits to small businesses, charities, and residential care homes who qualify for domestic energy VAT relief, as well as those in Northern Ireland.
For the poorest households, who typically spend a higher proportion of their income on energy, this policy is particularly supportive. The government has highlighted that it aims to put more money directly into people's pockets during a time when it's needed most. With winter approaching and bills piling up, this VAT cut could be just what many families need to stay afloat.