On his second day as prime minister, Andy Burnham announced a VAT cut on household electricity bills – a move that will save the typical home about £45 a year, but which critics say is not fully funded.
The reduction, from 5% to 0%, takes effect on 1 October and applies to domestic electricity bills in England, Scotland and Wales. Northern Ireland will receive equivalent funding because of its different regulatory arrangements. The government told suppliers to pass the saving on to all household customers, including those on fixed tariffs. Small businesses, charities and residential care homes that qualify for the reduced VAT rate will also benefit.
“UK electricity VAT cut to 0% from October saves typical household £45/year; funded by scrapping digital ID programme, but critics question funding.”
The policy is Burnham's first major cost-of-living intervention since entering Downing Street. It is designed to ease pressure on households after energy prices rose 13% in July under Ofgem's price cap, driven by higher gas costs and global supply constraints linked to the US-Israeli war with Iran. The government estimates the cut will cost £850 million in the current financial year. To pay for it, ministers are cancelling the digital ID programme, which was due to cost £1.8 billion over three years. Critics – including former chief secretary to the Treasury Darren Jones and Shadow Chancellor Mel Stride – argue the digital ID savings are not real because the scheme was never funded in the first place. Business Secretary Jonathan Reynolds said the move is "a statement of priorities" and will give people "breathing space".
For UK households, the immediate effect is a modest reduction in annual electricity bills. However, energy costs remain high because of the July price cap rise and ongoing global pressures. The cut also makes electric heat pumps more financially attractive relative to gas boilers, as it reduces the gap between electricity and gas prices. Vulnerable households that are high electricity users – for example, those running medical equipment – could see larger absolute savings. But critics question whether the government can sustain the cut without clear funding, and the chancellor will set out detailed costings at the budget later this year.
Q: When does the VAT cut on electricity bills start? The reduction from 5% to 0% comes into effect on 1 October and applies to all household electricity bills in England, Scotland and Wales.
Q: How much will I save from the VAT cut? The government says a typical household will save about £45 a year. Larger households that use more electricity will save more; smaller households may save less.
Q: How is the government paying for this tax cut? It is funded by cancelling the digital ID programme, which was budgeted at £1.8 billion over three years. The VAT cut costs £850 million this financial year, but some critics say the ID scheme was never properly funded, so the cut may effectively be unfunded.
Chancellor John Healey said the cut will "provide some reassurance this winter". However, the government faces questions about how it will make up any shortfall. Healey will present a full budget later this year, which is expected to set out longer-term plans for bringing down living costs. Meanwhile, the higher energy prices caused by global instability are likely to persist, meaning the £45 saving may only partly offset the pressure on household budgets.