Millions of households across the UK are set to receive support with rising energy costs after the government announced plans to remove VAT from domestic electricity bills from 1 October.
The measure, unveiled by the Prime Minister as one of his first major decisions in office, is designed to provide immediate financial relief ahead of the winter months and ensure the reduction is reflected in the next Ofgem energy price cap.
The government said the move delivers on a commitment to give households "breathing space" during the ongoing cost of living pressures. The VAT reduction will apply throughout the current financial year and is being funded through the cancellation of the £1.8 billion Digital ID programme.
Further decisions on longer-term support measures will be considered at the Budget alongside forecasts from the Office for Budget Responsibility, with ministers insisting any future interventions will remain fully funded and in line with 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.”
According to government estimates, removing VAT from electricity bills could reduce the annual Ofgem price cap by around £45 from October.
The saving comes on top of the £150 reduction in energy costs announced at the previous Budget, taking total support for consumers even higher.
By focusing on electricity bills, ministers argue the policy will help a greater number of households manage rising costs while also contributing to efforts to reduce inflation.
Energy suppliers are expected to pass the VAT savings directly to customers, including those on fixed-price tariffs, mirroring the approach taken following previous government support measures.
The measure will not be limited to households. Small businesses that qualify for domestic energy VAT relief but are not VAT registered will also benefit, alongside eligible charities and residential care homes that currently receive the reduced energy VAT rate.
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.”
The government said the policy is aimed particularly at lower-income households, which typically spend a higher proportion of their income on energy.
Ministers cited ongoing global instability and recent geopolitical conflicts as factors behind sustained pressure on energy prices. The government argued that immediate intervention was necessary to provide support before winter demand increases.
In addition, the Northern Ireland Executive will receive comparable funding to enable support for households across Northern Ireland, ensuring the measure benefits families throughout the UK.
Image credit: iStock
