Money expert Martin Lewis has warned that Prime Minister Andy Burnham's planned VAT cut on electricity bills will be 'wiped out' by a sharp rise in energy costs. The new Labour leader announced a six-month holiday on VAT for electricity from October 1, which would save the average household £45. However, Mr Lewis said the saving would be more than offset by a forecast 5.1% increase in the Ofgem price cap, adding £93 to annual bills.
The warning came as Mr Burnham unveiled the measure as part of a package to tackle the cost-of-living crisis, which also includes a £2 bus fare cap. But Mr Lewis tweeted that the latest predictions from three independent sources showed the price cap rising on the same day the VAT cut takes effect. 'If this happens it will wipe out any household savings from the VAT cut during that price cap period,' he said.
Mr Lewis also raised concerns about households fixing their energy tariffs after October 1, beyond the six-month VAT reduction window. He plans to speak to the government to seek clarity on whether such fixes would increase once VAT is reinstated. The government has said energy firms should pass on the savings, but it is not a legal requirement.
The VAT cut will be funded by scrapping the digital ID project previously championed by Sir Keir Starmer, which was estimated to cost £600 million a year. New Chancellor John Healey said the measure 'will give families some breathing room on bills' and help reduce inflation. Officials estimate the policy will cost the Exchequer around £850 million in 2026/27 and lower the Consumer Prices Index by 0.10 percentage points.
Only electricity bills are covered by the VAT reduction; gas bills are unaffected. Darren Jones, a former ally of Sir Keir Starmer sacked by Mr Burnham, questioned how the cut would be paid for, saying the digital ID scheme was 'unfunded' and that the government must set out its plans at the budget.
