Andy Burnham, on his second day as prime minister, announced that VAT on household electricity bills would be cut to zero for six months from 1 October. The move is the first of a series of cost-of-living measures he promised during his leadership campaign. But even as he told his new cabinet that the government must be a “cost-of-living government”, a row erupted over how the policy would be paid for.
Households in Great Britain normally pay 5% VAT on their electricity. That charge is applied to the total of the daily standing charge and the cost of the units used. From 1 October – the same day the energy regulator Ofgem’s new price cap takes effect – the VAT element will be removed for six months, covering the winter months when bills are highest. The government says the saving equates to about £45 off the annual typical bill, based on average usage. People on fixed-rate tariffs will also see the saving, because VAT is still applied at the end of their bill.
“Andy Burnham's first major policy as PM cuts VAT on electricity bills for six months, but a funding row raises questions.”
The cut was Burnham’s first major policy announcement after taking office. He said he wanted to give families “breathing space” and “bring back hope”. The move follows his earlier decision to scrap the previous government’s digital ID scheme, which was projected to cost £1.8bn over three years. Downing Street said the £850m cost of the VAT cut for the rest of the financial year would be funded by redirecting that money. But Darren Jones, the former minister responsible for the digital ID programme under Sir Keir Starmer, said the scheme was “unfunded” and that Burnham would need to explain how the policy would be paid for. The Conservative shadow chancellor, Sir Mel Stride, accused Labour of “playing fast and loose with the public finances”.
The Institute for Fiscal Studies noted that since the start of the Iran war, gas prices had risen much more sharply than electricity prices – 24% compared with 5% – and that the VAT cut was therefore “not well targeted” at helping households hit hardest by the conflict. Energy experts at Cornwall Insight predicted the price cap might rise by 2% in October, meaning households could still end up paying more overall, even with the VAT removed.
For UK readers, the immediate impact is a small but welcome reduction in winter energy bills. However, the policy does nothing to address the underlying cost of generating electricity – green levies, carbon taxes and net-zero regulations remain in place. Households that rely heavily on electricity for heating will benefit most, while gas users see no direct saving. The funding row also raises questions about future tax rises or spending cuts: economists warn that if the digital ID savings are not real, the government may have to borrow more, cut elsewhere, or raise taxes.
Q: How much will I save on my electricity bill? The government estimates a typical household will save about £45 over the six-month period, based on average usage. Your actual saving depends on how much electricity you use, because VAT is charged on the total amount you consume.
Q: Will everyone in the UK get the VAT cut? No. The cut applies only to households in Great Britain. In Northern Ireland, VAT remains at 5% due to post-Brexit rules that require EU rates, but the Stormont government will receive money to fund its own cost-of-living measures.
Q: How is the government paying for this policy? Downing Street says the £850m cost will be covered by scrapping the digital ID scheme, which had £1.8bn earmarked for the next three years. However, critics – including the former minister in charge of digital ID – argue that the scheme was never properly funded, so the money may not exist.
What happens next depends on whether the government can convince the public and economic watchdogs that its sums add up. The VAT cut will take effect on 1 October, and more cost-of-living announcements are expected. The new chancellor, John Healey, will face pressure to set out a clear fiscal plan in the autumn Budget. Meanwhile, the energy price cap could rise again, potentially offsetting some of the VAT saving. The row over funding is likely to continue, with opposition parties demanding to know where the money will really come from.
