Prime Minister Andy Burnham has announced that VAT will be removed from domestic electricity bills from October 1, marking his first major policy since entering Downing Street. The £850 million tax cut will be funded by cancelling the Digital ID programme and is expected to reduce the annual Ofgem price cap by around £45, Chancellor John Healey confirmed.
Immediate Relief for Families
The measure forms part of Burnham's plan to 'bring back hope' for families struggling with the cost-of-living crisis. The Makerfield MP made the announcement just a day after promising a transformative 10-year plan for Britain. "I said I wanted to give people breathing space, and that's what I'm announcing on my second day as Prime Minister," Mr Burnham said. "We're taking immediate action to cut taxes on energy bills, put more money in people's pockets and bring back hope."
Chancellor's Statement and Economic Impact
Chancellor Healey said the energy tax cut would "give families some breathing room on bills, and provide some reassurance this winter." He added the measure would help bring down inflation while supporting households across the country. 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.
Energy Price Cap and Market Context
The energy price cap set by Ofgem is forecast by industry analysts to be £1,849 for a typical household, although the resumption of military action in the US-Iran war could push prices higher because of the disruption to global oil and gas markets. Energy suppliers are expected to pass the VAT reduction on to all customers, including those on fixed tariffs, the Government said.
