Newly appointed Prime Minister Andy Burnham has announced a reduction in VAT on household electricity bills from 5% to 0%, effective from October 1. The move, one of his first decisions in office, is intended to alleviate rising living costs and provide financial relief to millions of UK households.
Details of the VAT Cut
According to a government publication on July 21, the cut will apply to all domestic electricity bills for the current financial year. The government expects a typical household to save around £45 per year, though actual savings will vary based on energy usage. This saving is on top of the £150 already removed from bills in the last Budget.
The government stated: "Cutting VAT on electricity bills is expected to take around £45 off the yearly Ofgem price cap in October. By targeting electricity bills, more people will be supported with rising bills and the Government is helping to keep inflation down."
Impact on Consumers and Businesses
All suppliers are required to pass the VAT reduction to customers, including those on fixed tariffs. Small businesses that qualify for domestic energy VAT relief and are not registered for VAT, as well as charities and residential care homes eligible for the reduced rate, will also benefit.
Funding and Fiscal Responsibility
The £1.8 billion cost of the VAT cut over three years will be funded by cancelling the Digital ID programme. Ministers confirmed: "We are funding this through the cancellation of the Digital ID programme, which was going to cost £1.8bn over the next three years. Savings were due to be identified from within existing budgets through reprioritisation, which will now be redirected towards this measure."
Further long-term measures will be announced at the Budget, with all decisions funded and consistent with the government's fiscal rules.
Prime Minister's Statement
Prime Minister Andy Burnham said: "Westminster has not been working for people for too long, with families struggling with the cost of living. That needs to change. I said I wanted to give people breathing space, and that’s what I’m announcing on my second day as Prime Minister. We’re taking immediate action to cut taxes on energy bills, put more money in people’s pockets and bring back hope."
