Proposals being considered by Chancellor Rachel Reeves to cut the 5% VAT charge on electricity bills could backfire, according to experts. They argue the measure would disproportionately benefit wealthier households with larger homes and could increase carbon emissions, undermining the UK's climate commitments.
The plan, aimed at reducing energy costs and easing cost-of-living pressures, would cost the exchequer an estimated £2.5bn a year. Calculations by the charity Nesta suggest it would save the average household £86 annually. However, critics say the benefits would flow mainly to those with higher electricity usage, typically better-off households.
Tim Leunig, a former government adviser and visiting professor at the London School of Economics, described the idea as "a terrible idea," adding that "most of the benefit would go to people in larger houses with larger than average electricity bills." A former energy department official noted that while the policy is simple and easy for voters to understand, it fails to target support to those most in need.
Experts also warn of potential damage to relations with the EU, which sets a minimum VAT rate of 5% on energy bills. Additionally, reducing tax on electricity could encourage higher consumption, undermining green goals. Some officials instead advocate removing green levies from bills and funding them through general taxation, which would spread costs more equitably based on income rather than energy use.
Madeleine Gabriel, director of sustainability at Nesta, suggested moving levies from electricity to gas bills to make heat pumps more cost-effective compared to gas boilers. The Climate Change Committee has also recommended shifting levies off electricity to support decarbonisation. Reeves faces a challenging budget on 26 November, needing to fill a £30bn fiscal shortfall while keeping living costs in check.
