Households will see a major change to their energy bills in just three days, but many could still end up paying more despite a new tax cut. From October 1, VAT will be removed from domestic electricity bills, dropping from the current 5% rate to zero.
VAT cut and new Price Cap
The Government says households don't need to do anything to get the saving, with suppliers expected to automatically stop charging VAT on electricity. It is expected to save households around £45 a year on average and will also apply to people who have already locked into a fixed tariff.
But the change doesn't necessarily mean your overall energy bill is about to get cheaper. Ofgem's new Energy Price Cap also comes into force on October 1 and will rise by 4%.
Typical bills rise by £60
For a typical household paying by Direct Debit for both gas and electricity, the annual figure will rise from £1,663 to £1,723 – an increase of around £60. The regulator says higher wholesale gas prices are behind much of the increase.
While the VAT cut means electricity costs will remain broadly stable, gas bills are expected to rise by around 8%. Households which don't use gas are expected to see a much smaller increase of less than 1%.
Without the Government's decision to remove VAT from electricity, Ofgem says the typical annual figure would have been around £45 higher. The amount people actually pay will still depend on how much energy they use, as the £1,723 figure is not a maximum household bill.
New rates and standing charges
Average electricity rates for Direct Debit customers will move from 26.11p per kWh to 26.32p from October, while the average daily electricity standing charge will fall from 57.19p to 54.83p.
Gas will continue to have 5% VAT added. Its average unit rate will rise from 7.33p per kWh to 7.97p, while the daily standing charge increases from 29.04p to 29.68p.
The electricity VAT cut is currently due to remain in place until March 31, 2027. People using prepayment meters will also benefit, with VAT no longer added when they top up for electricity from October 1.
