Three major energy providers have reacted to Andy Burnham's announcement that VAT will be removed from domestic electricity from October 1. The Prime Minister said he will cut tax on electricity bills on Tuesday (July 21). It's his first major new policy as leader of the government.
Chancellor confirms funding source
Chancellor John Healey said the cut will be funded from cancelling the Digital ID programme - a scheme introduced by Sir Keir Starmer just last year.
British Gas, Octopus Energy and E.ON Next have all put out statements welcoming the measure and confirming savings from the change will be passed on to customers.
British Gas confirms automatic savings
John Evans, Commercial Director of British Gas Energy said: "Any help with energy bills is welcome news. That's why we're pleased to confirm that we'll pass the new VAT reduction onto all eligible British Gas household electricity customers from 1st October 2026."
Mr Evans added: "The VAT cut is expected to save a typical household around £45 a year, although the exact amount you save will depend on how much electricity you use."
The VAT reduction fee also applies to customers on fixed tariffs. The reduced VAT rate will be reflected on your bill once the change comes into effect. Mr Evans added that customers don't need to contact British Gas. The changes will be applied automatically.
E.ON Next and Octopus Energy respond
E.ON Next also confirmed that the savings will be automatically applied to electricity bills for customers on fixed and variable tariffs. A spokesperson for the company said: "Every step the Government takes to support energy customers is something we welcome. Our electricity customers can expect to see the removal of VAT reflected in their bill from 1 October."
CEO of Octopus Energy, Greg Jackson, described Mr Burnham's policy as a "great first step", adding: "We hope it signals that it’s a top government priority to bring bills down even further for homes and businesses."
Martin Lewis gives his verdict
Martin Lewis has also given his thoughts on the new measure. The Money Saving Expert took to X to break down what exactly the VAT reduction will mean for energy customers. He said that while the change is "a good totemic step and very welcomed, in practice people won't feel much benefit".
Mr Lewis explained that the price cap is expected to rise by 3.1 per cent from October, which "on typical bills is over £50 on an annualised basis". He said the gain from the VAT cut would be "mostly eaten up by that", especially considering a further rise is predicted in January.
He continued: "Another way to put it in context of what '4.8%' means. Ten days ago the cheapest fix was 14% less than the Price Cap, now it is 8% less as wholesale rates have jumped due to the Middle East conflict. Ultimately though it does mean people will pay less than they would've done without this. Yet it is going to need a lot more policy cost reductions, likely at the budget, for things to feel materially cheaper."
PM's plan to 'bring back hope'
The electricity tax cut measure is part of the former Mayor of Greater Manchester's plan to 'bring back hope' for families struggling amid the cost-of-living crisis. Speaking earlier this week, the new PM said: "Westminster has not been working for people for too long, with families struggling with the cost of living. That needs to change. 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."
