The new Prime Minister Andy Burnham has announced a VAT cut on electricity bills from October 2026, aiming to ease the cost of living for millions of households. The move is expected to save the typical household around £45 based on the current Ofgem price cap, though actual savings depend on energy consumption.
How much will the VAT cut save you?
The government estimates that removing the 5% VAT on electricity will save the average household about £45 per year. However, high electricity users will see larger savings since the cut applies only to electricity bills. Richard Neudegg, director of regulation at Uswitch.com, noted: "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."
The Ofgem price cap rose by around 13% in July 2026 and currently stands at £1,663 per year for a typical direct debit household. The cap will be updated again in October, with analysts warning that wholesale prices remain under pressure due to the Middle East conflict.
Will fixed tariff customers benefit?
Yes, energy suppliers are expected to pass the VAT reduction to all customers, including those on fixed tariffs. Fixed tariffs involve a set unit price and daily standing charge for a fixed period, unlike the price cap which changes every three months.
How much is VAT on energy bills normally?
VAT on energy bills is currently 5%, which suppliers typically pass on to customers. Eliminating this tax will cost the government approximately £850 million.
How is the VAT cut funded?
The measure will be funded by scrapping the previous government's digital ID project, which was estimated to cost around £600 million per year over three years. Funding for that scheme was due from existing departmental budgets, which will now be reprioritised.
What have the Prime Minister and Chancellor said?
Prime Minister Andy Burnham stated: "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 added: "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."
