VAT to be cut from electricity bills in October

VAT will be cut from household electricity bills, the government has announced, as part of new prime minister Andy Burnham’s plan to offer help with the cost of living.

The reduction from 5% VAT will come into effect on 1 October, saving a typical household about £45 a year.

Ministers said it would be funded by savings from the cancellation of the digital ID programme, which was going to cost £1.8bn over the next three years. The announcement is estimated to cost £850m this financial year, the government said.

John Healey, the new chancellor, said that the announcement would “provide some reassurance this winter.”

Suppliers have been told the VAT reduction should be passed on to all household customers, including those on fixed tariffs, as was the case when some charges were taken off bills in April.

The cut will take effect in England, Scotland and Wales, but equivalent funding would be given to Northern Ireland, which is regulated differently, the government said.

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.

Cutting VAT is a relatively blunt tool to reduce an energy bill – with larger households likely to save more as they use more electricity.

However, some vulnerable households are also high electricity users, such as for running medical equipment.

The announcement comes the day after Burnham became the UK’s seventh prime minister since 2016 with a pledge to “bring back hope” to Britain.

Former defence secretary Healey was made chancellor as part of Burnham’s cabinet appointments on Monday.

He replaced Rachel Reeves, who had served as Sir Keir Starmer’s chancellor since Labour’s 2024 landslide election win.

Burnham’s new cabinet is due to meet for the first time at lunchtime on Tuesday.