New PM cuts tax on household electricity bills to give breathing space on cost of living

Millions of households across the UK will benefit from immediate action to help with their electricity bills this winter, the Prime Minister has announced as one of his first decisions in office. 

This follows his commitment to the nation on the steps of Downing Street yesterday to give people some breathing space and help with the cost of living. 

Government is tackling rising bills with a tax cut to remove VAT from domestic electricity bills from October 1 in time to impact the next Ofgem price cap. This immediate action applies and is funded for this financial year.

The cost of this immediate action for this financial year – taken now, before the next price cap – is being funded from the cancellation of the (£1.8bn) Digital ID programme.

Any further action, including on funding for longer-term measures, will be taken at the Budget alongside an OBR forecast.  All decisions at that point will continue to be funded and also consistent with the government’s fiscal rules.

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.

Cutting VAT on electricity bills is expected to take around £45 off the yearly Ofgem price cap in October. This is on top of the £150 removed from bills at the last Budget.  

By targeting electricity bills, more people will be supported with rising bills and the government is helping to keep inflation down.  

All suppliers are expected to pass the VAT reduction on to all customers, including those on fixed tariffs, as they did with the £150 of costs taken off energy bills announced at the last Budget.

Small businesses who qualify for the 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.  

Chancellor of the Exchequer John Healey MP 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. 

This measure is funded this year from cancelling the Digital ID programme, and it will help bring down inflation while supporting households in every postcode.

As part of the day one commitment to bring back hope to Britain, the change supports the poorest households, who spend a higher percentage of their income on energy bills. 

Energy bills have risen since Russia’s invasion of Ukraine and have been exacerbated because of the war in Iran. But people need support now, which is why the government has acted to provide immediate breathing space for millions of households.

The NI Executive will receive comparable funding to enable it to support NI Households with the cost of living to ensure households across the UK benefit.  

Additional informations

• This VAT cut, from 5% to 0%, is estimated to reduce CPI inflation by around 0.10 percentage points and RPI by around 0.14 percentage points. 
• This action is estimated to cost around £850 million in 2026-27 on the basis of estimated electricity prices. Updated costs will be set out at Budget. 
• 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. Any further action, including on funding for longer-term measures, will be taken at the Budget, and all decisions at that point will be funded and also consistent with the government’s fiscal rules.  
• The government expects all suppliers to pass the VAT reduction on to all customers, including those on fixed tariffs, as they did with the £150 of costs taken off energy bills announced at the last Budget. 

Northern Ireland 

• Under the terms of the UK’s exit from the EU, the EU VAT rates apply in NI on goods, including electricity. Agreement from the EU to implement in NI would be necessary. 
• Therefore to ensure that households in NI receive the same support as quickly as the rest of the UK, the NI Executive will receive comparable funding to enable it to support NI Households with the Cost of Living.