The government announced that VAT on household electricity bills will be cut from 5% to zero, with the change coming into effect on 1 October. The measure, part of Prime Minister Andy Burnham’s cost‑of‑living pledge, is expected to save the typical household about £45 a year. Ministers said the relief would be funded by savings from scrapping the digital ID programme, which had been projected to cost £1.8bn over the next three years. The government estimated the policy would cost £850m in the current financial year.
But the plan drew criticism from Labour MPs, including Darren Jones, who described it as an unfunded tax cut. Jonathan Reynolds, the new business secretary, said the VAT cut would give people “breathing space” and would be financed “until the end of the financial year” in March 2027; any longer‑term decisions would be announced in the Budget.
Suppliers have been told to pass the VAT reduction on to all household customers, including those on fixed tariffs, mirroring earlier reductions in April. The cut will apply in England, Scotland and Wales, with Northern Ireland receiving equivalent funding though EU rules had previously restricted VAT applicability in NI. Small businesses eligible for domestic energy VAT relief, as well as charities and residential care homes not VAT‑registered, will also benefit.
The government described cutting VAT as a basic tool to lower bills, noting that larger households typically save more due to higher electricity usage. Reynolds told the BBC that the cut would be funded by redirecting spending from the digital ID programme, arguing that scrapping the scheme removed “pressure” from the budget and enabled real help for households. The Office for Budget Responsibility had said last November that digital ID would cost provisionally £1.8bn over three years, with savings from other departments expected to cover the cost. Government sources stressed that departments had been seeking savings to fund Digital ID since the OBR forecast and that those funds would now be redirected to the VAT cut.
Household energy prices had risen earlier in July, with millions in England, Scotland and Wales facing higher bills under Ofgem’s price cap. Analysts warned winter pressures could persist amid broader energy market dynamics, including global gas and oil supply concerns. The VAT cut applies only to this financial year; any extension would require Budget action. Burnham, in his first speech as prime minister, said the measure would put more money in people’s pockets, while opponents urged a longer‑term, more comprehensive approach to support for households.
The policy marks the government’s second intervention on energy bills in six months. Earlier, former chancellor Rachel Reeves removed one levy and shifted others onto general taxation to lower bills in April. Critics and industry observers have cautioned that the VAT relief addresses the symptom of high energy costs rather than broader structural issues in the energy market.
The government has also noted that Northern Ireland background rules prevent automatic application of the change there, but funding will be provided to NI under a separate arrangement. The UK energy landscape remains sensitive to global events and seasonal demand, which could influence the policy’s inflation impact and practical delivery in the months ahead.
