Households and businesses across the UK will experience reduced electricity bills this winter after new Prime Minister Andy Burnham announced that VAT on domestic electricity will be removed from 1 October 2026.
The move, one of Burnham’s first decisions in office, is intended to give families “breathing space” amid continuing cost-of-living pressures. The government says cutting VAT from 5% to 0% will reduce the annual Ofgem price cap by around £45 from October, on top of £150 already removed from bills at the last Budget.
The tax cut will be funded this financial year by cancelling the £1.8 billion Digital ID programme. Ministers say any longer-term support or future funding decisions will be considered at the Budget alongside an OBR forecast and must remain consistent with the government’s fiscal rules.
Suppliers are expected to pass the VAT reduction on to all customers, including those on fixed tariffs. Small businesses that qualify for domestic energy VAT relief and are not VAT-registered, as well as eligible charities and residential care homes, are also expected to benefit.
The government estimates the measure will lower CPI inflation by around 0.10 percentage points and RPI by around 0.14 percentage points. It is expected to cost around £850 million in 2026–27, with updated figures due at the Budget.
Northern Ireland will be treated separately because EU VAT rules continue to apply there for goods including electricity under the UK’s exit arrangements. The Northern Ireland Executive will receive comparable funding so it can provide equivalent cost-of-living support to households.
If you have any questions about VAT, please contact us via vat@ct.me.