Money expert Martin Lewis has warned that Andy Burnham's VAT cut on electricity bills will be 'wiped out' by new charges adding an average of £93 to bills.
New Prime Minister Andy Burnham launched his premiership with a 6-month holiday on Value Added Tax for electricity bills from October 1, saving the average household £45. The move is part of measures including a £2 bus fare cap aimed at curbing the cost of living crisis.
VAT savings offset by price cap rise
But Lewis warned the cut will be 'wiped out' by the next rise in energy bills set to take effect on the same day. Due to the conflict in the Middle East, the Ofgem price cap is forecast to increase by an average of 5.1% from October 1 for typical households.
Martin tweeted: 'I've just got the latest energy bill predictions. The average of 3 sources show the Price Cap rising 5.1% on 1 Oct - as the last week has seen very high wholesale rates. An annualised rise of £93 on a typical bill.'
'If this happens it will wipe out any household savings from the VAT cut during that Price Cap period (those on fixes will still see a 4.8% reduction).'
Clarity needed for fixed-rate customers
Martin added he plans to speak to the government about those who start a new fix after October 1 beyond the 6-month cut window. Current plans state energy firms should pass on VAT savings even to households on fixes, though this is not a legal requirement.
There has been no indication of what will happen to those fixing for longer than six months, or whether fixes will rise at the end of the period while the fix is still in place.
Martin added: 'I'm going to speak to Energy department to ask about clarity for those who fix after 1 Oct at the new no VAT rate, but then on 1 April if VAT is added back (as the cut only lasts 6mths) does that mean fixes will rise - how should that be communicated to fixers.'
Funding and impact
The move will be funded in part by scrapping Sir Keir Starmer's digital ID project, estimated to cost around £600 million-a-year over three years. Funding for that scheme was due from savings within existing departmental budgets, now reprioritised to fund the VAT cut.
The energy price cap set by Ofgem is forecast by industry analysts to be £1,849 for a typical household, although resumption of military action in the US-Iran war could push prices higher due to disruption to global oil and gas markets.
New Chancellor John Healey said: '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.'
Officials said the VAT cut, from 5% to 0%, is estimated to reduce the consumer prices index measure of inflation by around 0.10 percentage points. The policy will cost the Exchequer around £850 million in 2026/27. For households with dual fuel bills the VAT cut will only apply to electricity used, not gas.
Darren Jones, a key Starmer loyalist sacked by Mr Burnham, said the digital ID scheme was 'unfunded', raising questions about how the VAT cut would be paid for. He said: 'The Government will have to set out how it will pay for its new policies at the budget.'
