New Prime Minister Andy Burnham has promised to ease the cost of living – and this includes new help for energy bills this winter
VAT will be cut from electricity bills from this October in a boost for millions of households.
The new Prime Minister Andy Burnham says the move will “put more money in people’s pockets and bring back hope”.
Energy bills have risen again in recent months following the conflict in the Middle East – and costs are expected to remain high this winter.
So exactly how much money will cutting VAT save you on your bill? We explain what you need to know.
Follow our politics live blog as Andy Burnham announces first policies as new PM
How much money will cutting VAT really save on your energy bill?
The government expects that cutting VAT will save the typical household around £45 based on the current Ofgem price cap. But this does depend on your energy consumption. The VAT cut will be applied to electricity bills – so high electricity users will see the biggest cut.
Energy analysts say the VAT reduction could also be offset by another rise in the Ofgem price cap. There is continued pressure on wholesale prices, driven by the situation in the Middle East, which means the Ofgem price cap is likely to remain high this winter.
Richard Neudegg, director of regulation at Uswitch.com, said: “Some supplier predictions suggest the next price cap could rise 5% from October for a household with both gas and electricity, so this tax change could take the sting out of a potential increase.”
Martin Lewis said in a post on X: “The energy Price Cap on 1 October for elec & gas is currently predicted to rise 3.1% which on typical bills is over £50 on an annualised basis (and that’s likely to be in the right ballpark as we’re a decent way through the analysis period).
“So the VAT cut gain over 6mths is mostly eaten up by that. Especially as the prediction is a further rise in January (though that is far more crystal ball gazing).”
The Ofgem price cap is rose by around 13% this month and will be updated again in October. For the typical household that pays by direct debit, the price cap is currently £1,663 a year.
I’m on a fixed tariff – will this benefit me?
Yes, energy suppliers are expected to pass the VAT reduction on to all customers, including those on fixed tariffs. A fixed energy tariff is where you have agreed to pay a set unit price for gas and electricity and your daily standing charge for a set period. In comparison, the price cap unit rates and standing charges are updated every three months.
How much is VAT on energy bills normally?
VAT is currently charged at 5% and suppliers generally pass this cost on customers. Getting rid of VAT is expected to cost the government £850million.
How is the government funding this?
The government said it will be funded in part by scrapping Sir Keir Starmer’s digital ID project, which had been estimated to cost around £600 million-a-year over three years.
But just hours after the announcement, Darren Jones – who was sacked as Chief Secretary to the Prime Minister yesterday – suggested the funding was not as straight forward.
He said: “Good news that VAT will be cut on electricity bills. It’s a simple way for families to save a few quid, and to mechanically help to keep inflation that little bit lower.
“But the DigitalID program was unfunded. The government will have to set out how it will pay for its new policies at the Budget.”
What has Andy Burnham said?
The Prime Minister said: “I said I wanted to give people breathing space, and that’s what I’m announcing on my second day as Prime Minister.
“We’re taking immediate action to cut taxes on energy bills, put more money in people’s pockets and bring back hope.”
Chancellor John Healey said: “For too long, too many people have struggled with the cost of living. Today’s energy tax cut will give families some breathing room on bills, and provide some reassurance this winter.
“This measure is funded this year from cancelling the digital ID programme, and it will help bring down inflation while supporting households in every postcode.”
