The government has today announced immediate action to cut VAT on electricity bills to give millions of households breathing space on the cost of living.

Domestic electricity is currently subject to the reduced rate of VAT (5%). From October 1, in time to impact the next Ofgem price cap, a zero VAT rate (0%) will apply instead, supporting households with cost-of-living pressures and helping to keep inflation down. This will be implemented via a Statutory Instrument laid when Parliament returns in September.

The Northern Ireland Executive will receive comparable funding to enable it to support households in Northern Ireland with the cost of living to ensure households across the UK benefit.

This measure is estimated to cost around £850m in 2026/27, and this cost is funded from the cancellation of the Digital ID programme, which was expected to cost £1.8bn over three years. Any further action, including on funding for longer-term measures, will be taken at the Budget alongside an OBR forecast. All decisions will be funded and will be consistent with meeting the government’s fiscal rules.

Cutting VAT on electricity bills is expected to take around £45 off the yearly Ofgem price cap in October. This is on top of the average £150 of costs removed from bills at the last Budget.

All suppliers are expected to pass the VAT reduction on to all customers, including those on fixed tariffs, as they did with the average £150 of costs taken off energy bills announced at the last Budget.

Small businesses who qualify for the domestic energy VAT relief and are not registered for VAT, as well as charities and residential care homes eligible for the reduced rate will also benefit.

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