New PM Cuts VAT on Electricity Bills in First Major Energy Move
New Prime Minister Andy Burnham has scrapped VAT on household electricity bills in one of his first acts in office.
From 1 October, VAT on domestic electricity will drop from 5% to 0%, taking around £45 off the annual Ofgem price cap. The measure is funded this financial year by cancelling the £1.8 billion Digital ID programme. Suppliers are required to pass the saving on to all customers, including those on fixed tariffs, and eligible charities, care homes and some small businesses will also benefit. The cut is a six-month measure, running from October to the end of the financial year. Whether it continues beyond that will be decided at the Autumn Budget.
Why electricity, not gas
Targeting electricity rather than gas may also signal a broader shift in policy. Electricity has traditionally cost several times more than gas for the same amount of energy, for two main reasons.
The first is policy costs. Although gas and electricity have been subject to the same 5% VAT rate, electricity bills have traditionally carried a greater share of the levies that fund renewable energy schemes and grid upgrades, something many energy experts argue has slowed the move towards electric vehicles and heat pumps.
The second is how wholesale electricity is priced. The price is set by the most expensive generator needed to meet demand at any given moment, and that is usually a gas-fired power station, even when much of the electricity actually being used comes from cheaper wind or solar. In effect, gas continues to set the price of electricity most of the time, regardless of how much renewable generation is on the system.
Together, these two factors help explain why the cost gap has stayed wide even as renewables have grown. The picture also varies by technology: electric cars charged at home are typically already cheaper to run than petrol cars, thanks to how much more efficient they are, while heat pumps remain closer to parity with gas boilers and can cost more to run in some homes. A VAT cut on electricity alone will not fully resolve that, but it moves in that direction. Burnham has previously spoken in favour of reducing electricity costs as part of the broader net zero agenda.
What comes next
Further, longer-term changes to energy taxation or bill levies could be considered at the Budget, once the Office for Budget Responsibility has produced updated forecasts. One option potentially available to ministers is rebalancing where policy costs sit in the first place. The 2025 Autumn Budget already moved 75% of one such levy, the Renewables Obligation, off electricity bills and onto general taxation, and bodies including the Climate Change Committee and Citizens Advice have argued for going further, which could make running a heat pump more favourable compared with a gas boiler and encourage more households to switch.
Separately, the government has also been working on reforms to loosen the link between gas and electricity prices, including offering renewable generators new fixed-price contracts so their output is no longer priced off the marginal gas rate. If that work progresses, it could ease the underlying cost gap in a more lasting way than a VAT cut alone.
For now, the immediate effect is a reduced bill this winter. The wider significance may lie in whether this marks the beginning of a longer-term shift towards making electricity the cheaper default choice.