UK households stand to gain up to £255 each by combining a fixed energy tariff with the removal of 5% VAT on electricity bills, effective October 1, announced by new Prime Minister Andy Burnham on Tuesday, July 21. The VAT cut will save the average household £45 per year, according to experts at price comparison site Uswitch.
VAT Removal and Energy Price Cap Context
The announcement comes as household energy prices remain high, following a £221 increase to the price cap on July 1, raising it to £1,862 per year. The VAT removal applies to electricity only, not gas, but covers all tariff types, including fixed deals. Uswitch notes that fixed tariffs currently undercut the October price cap by an average of £210, meaning households could save a total of £255 if they lock in a fix before the VAT change.
Richard Neudegg, director of regulation at Uswitch.com, said: "Removing 5% VAT on electricity bills from 1 October will be warmly welcomed by households as they head into the colder months, when energy use rises sharply. This would be £45 off a typical home’s annual bill based on the current electricity price cap. This change applies to electricity, not gas, but it will apply across the board regardless of tariff type, so if you switch to a fixed deal now, you’ll still get the tax saving from October."
Fixed Tariffs and Potential Price Cap Rise
Neudegg added: "There is continued pressure on wholesale prices, driven by the situation in the Middle East, meaning it is likely that the October 1 price cap will increase. 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. There's still time for customers to lock in significant savings before winter by switching to a good-priced fixed tariff. The cheapest deals are currently undercutting standard rates by £210 for the average household. Doing so on top of this VAT change could leave households considerably better off over the winter."
Campaigners Call for Further Action
However, campaigners urge the government to go further, especially as energy bills are expected to rise again due to fresh chaos in the Strait of Hormuz and US missile strikes on Iran. Simon Francis, coordinator of the End Fuel Poverty Coalition, said: "Removing VAT from electricity bills is a positive statement of intent by the new administration. But it does not address the scale of what households are facing, with millions still left paying an unaffordable share of their income on energy and record levels of energy debt built up over successive winters of high bills. The Prime Minister’s next move must be to go even further on bringing down the cost of energy and bringing in increased levels of targeted support for those who need it most: an enhanced Warm Home Discount, reformed Cold Weather Payments and an energy debt relief scheme."
Francis added: "This breathing space is also not a cure. The only way to bring bills down for good is to change how they are set. That means breaking the link between gas and electricity prices, tackling excess profits in the energy industry and ending our exposure to volatile fossil fuel markets through home-grown renewables and more energy efficient homes."
Which? Criticises Uneven Benefits
Emily Seymour, energy editor at Which?, said: "Any cut to household electricity bills is positive news for consumers facing high energy costs. However, those with the highest bills will see the biggest cash saving, meaning the benefit won’t be felt equally across all households. And with energy prices expected to rise again this winter, any relief is likely to be short-lived. If the Government is serious about tackling energy costs for everyone, and particularly those most at risk of fuel poverty, it should go further and move environmental and social levies into general taxation. That would deliver a fairer, more meaningful reduction in bills for all households."
