New Prime Minister Andy Burnham has announced a tax cut on household electricity bills in his first major policy statement since taking office. The VAT rate on domestic electricity will be reduced from 5% to 0% starting on 1st October 2026.
When announcing the policy the Prime Minister stated "We’re taking immediate action to cut taxes on energy bills, put more money in people’s pockets and bring back hope."
The measure will apply to all households across England, Wales and Scotland and is expected to stay in place until the end of the financial year in March 2027. Below, we explain what this announcement means for your energy bills and how the tax cut is being funded.
How much will you save on your electricity bill?
Removing the 5% VAT rate from electricity bills will save the average household around £45 a year. The change comes into effect on 1st October 2026, the same date as the next Ofgem energy price cap update. Industry analysts are predicting that the Ofgem energy price cap will increase by 5.1% in October, driven by the ongoing volatility in the global wholesale energy markets. This means that while the tax portion of your bill will fall, the cost of the electricity itself is expected to rise, essentially cancelling out the government's tax cut.
Despite this, the removal of VAT does soften the blow of future price hikes. It also comes on top of the £150 reduction announced in the previous Budget. Energy suppliers will be expected to pass the VAT savings directly on to customers, ensuring that everyone benefits regardless of their provider.
Will small businesses and charities benefit?
The government has confirmed that the electricity tax cut will also be extended to certain non-domestic energy users to help ease their operational costs.
If you run a small business that currently qualifies for domestic energy VAT relief and you are not registered for VAT, your electricity bill will also benefit from the 0% rate. In addition, charities and residential care homes that are eligible for the reduced VAT rate on their energy use and will see their electricity tax drop to zero from 1st October 2026.
If you run a charity or a home-based business and are unsure of your current VAT rate, it is a good idea to check your latest bill. You can also speak directly to your energy supplier to ensure your account is set up to receive the correct tax relief ahead of the October change.
What does the VAT cut mean for Northern Ireland?
The newly announced VAT cut on household electricity bills will not apply to residents in Northern Ireland. The government has confirmed that the region is excluded from the tax reduction due to complications related to its Brexit deal. Instead of the direct 0% VAT rate, Stormont ministers will receive additional funding from the UK government. This money is intended to be used for alternative cost-of-living measures to support households in Northern Ireland. At this stage, it remains unclear exactly how much money will be allocated or when and how it will be spent.
Does this apply to gas bills?
No, the newly announced VAT cut applies exclusively to electricity. The government has targeted electricity to ensure the widest possible support, as more households rely on electricity compared to gas.
How is the energy tax cut being funded?
According to Chancellor John Healey, the £850 million cost of the policy for the 2026/27 financial year will be funded by scrapping the £1.8 billion Digital ID programme. The digital identity scheme was originally proposed by former Prime Minister Sir Keir Starmer, but the new administration has cancelled it to reallocate funds directly to household support. However, critics have challenged these figures, with outgoing Chief Secretary to the Treasury Darren Jones warning that the Digital ID scheme itself was never actually funded in the government's budgets, meaning that the new policy amounts to an 'unfunded tax cut.
Do you need to do anything to claim the cut?
You will not need to take any action to benefit from the VAT reduction. Your energy supplier will automatically apply the 0% VAT rate to your electricity bill from 1st October 2026. This applies whether you are on a standard variable tariff governed by the Ofgem price cap or if you are already locked into a fixed-rate energy deal.
Is now a good time to fix your energy tariff?
While the VAT cut will lower the overall cost of electricity, wholesale energy prices remain volatile due to ongoing international conflicts. This means the underlying Ofgem price cap is still predicted by many analysts to increase in October. If you value certainty and want to protect yourself from future price hikes, it may be a good time to explore a fixed-rate energy deal. The VAT cut will apply to fixed tariffs as well, meaning you will not miss out on the government's tax savings if you decide to lock in your rates now. Read our article, '
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