On his second day as prime minister, Andy Burnham announced the removal of VAT from household electricity bills, a cut worth about £45 a year for a typical household, in his first major cost-of-living intervention. The reduction from 5% to 0% will take effect on 1 October, affecting bills across England, Scotland and Wales, with equivalent funding promised for Northern Ireland, where VAT remains due to EU tax laws.
Burnham said in a statement: "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."
“New PM Andy Burnham cuts VAT on electricity bills by 5% from October, saving £45 a year, as critics question funding.”
The move comes as household energy prices rose by 13% in July under Ofgem's price cap, driven by higher gas costs linked to the US-Israeli war with Iran, which has constrained global oil and LNG supplies. The new chancellor, John Healey, said the cut would "give families some breathing room on bills, and provide some reassurance this winter."
Downing Street said the £850m cost of the cut this financial year would be funded by scrapping the digital ID programme, which was due to cost £1.8bn over three years. But critics immediately questioned the maths. Darren Jones, sacked as chief secretary to the prime minister on Monday, wrote on X that the digital ID programme was unfunded, calling the tax cut "unfunded" and demanding the government set out how it would pay for new policies at the budget.
Shadow Chancellor Mel Stride went further: "The cuts to the Digital ID card budget are not real because the money was never provided in the first place. We are only one day in and already its smoke and mirrors on the public finances."
Business Secretary Jonathan Reynolds defended the announcement on BBC Breakfast, saying: "We're not saying it's everything but it will give people breathing space. It's a statement of priorities from the new administration."
Suppliers have been told to pass on the VAT reduction to all household customers, including those on fixed tariffs, as happened when some charges were removed from bills in April. Small businesses, charities and residential care homes eligible for the reduced rate will also benefit. The cut is also expected to encourage consumers to replace gas boilers with electric heat pumps by narrowing the gap between gas and electricity prices.
John Healey will set out detailed costings and longer-term action on living costs at the budget later this year, with Burnham's allies reportedly considering reducing the cap on bus fares and temporarily freezing private sector rents. For now, the government faces the challenge of proving its first big promise is more than "smoke and mirrors."