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TaxVAT scrapped on electricity bills: what the cut saves you and when
In one of his first acts as Prime Minister, Andy Burnham has announced that VAT will be removed from household electricity bills. Here's what's changing, when it takes effect, how much you could save — and the argument that has already broken out over how it's paid for.
How the saving works
Domestic energy is charged a reduced 5% rate of VAT, rather than the standard 20% that applies to most goods and services. Removing that 5% entirely lowers the total electricity bill. Because it's a percentage, the cash saving scales with how much electricity you use — larger households, who tend to use more, will save more than the "typical" £45 figure, while lower users will save a little less.
The government says all suppliers are expected to pass the reduction on to every customer, including those on fixed tariffs. It applies in England, Scotland and Wales; Northern Ireland is regulated differently (EU VAT rules apply there), so the government says it will provide comparable funding to support NI households instead. Small businesses that qualify for the domestic energy VAT relief and aren't VAT-registered, plus charities and residential care homes on the reduced rate, will also benefit.
How today's bills compare
A saving of around £45 is welcome, but household energy still costs far more than it did a few years ago. The chart below shows the Ofgem price cap — the estimated bill for a typical household over a year, paying by direct debit. Each coloured bar is the cap at a different date, so you can see the huge spike during the 2022–23 energy crisis and where bills sit now.
What a typical household's yearly energy bill has been
How to read it: each coloured bar is a different date. The taller the bar, the bigger the typical yearly bill. The red bar is the January 2023 crisis peak; the gold bar on the far right is the most recent cap.
Chart: Tallyfigures, built from public Ofgem data. Figures are the Ofgem energy price cap for a typical household paying by direct debit. In January 2023 the cap reached £4,414, but a separate government scheme (the Energy Price Guarantee) temporarily held typical bills to about £2,500 at the time. Figures via Ofgem, as reported by the BBC.
How it's funded — and the criticism
The government says the cut costs around £850 million this financial year and is funded by cancelling the planned Digital ID programme, which was set to cost £1.8bn over three years. It also estimates the measure will trim CPI inflation by around 0.1 percentage points.
The move drew immediate criticism from across the political spectrum. Darren Jones — who was removed as chief secretary to the Prime Minister the same week — and the Conservatives' shadow chancellor, Mel Stride, both argued the funding was effectively an unfunded tax cut, describing the Digital ID savings as money that "was never provided in the first place." The End Fuel Poverty Coalition welcomed the reduction as a "positive statement of intent" but said it "does not address the scale of what households are facing." Supporters counter that it delivers immediate help before winter and that all decisions on longer-term funding will be set out at the Budget.
Will it last?
Importantly, the cut currently applies only to this financial year. Whether it continues beyond that would have to be decided at a future Budget, alongside an independent OBR forecast. So treat the £45 as help for the coming year rather than a permanent change — for now.
GOV.UK — New PM cuts tax on household electricity bills
BBC News — VAT to be cut from household electricity bills in October
BBC News (live) — Burnham's first full day as PM
This article is general information, not financial advice. Figures are as announced by the government on 21 July 2026 and reported by the BBC; the estimated £45 saving is for a typical household and your own saving depends on how much electricity you use. Policy can change — always check GOV.UK for the latest.