The new Prime Minister, Andy Burnham, has announced that VAT on household electricity bills in Great Britain will be cut from 5% to 0% for six months, starting on the 1st October. Here’s a quick update on what will change, the potential benefits, and whether it’s a good time to switch energy supplier.
Key Takeaways
VAT on electricity cut from 5% to 0%, 1 October 2026 – 31 March 2027
Applies to electricity only, not gas
Saves an estimated £25–£45 per average household over the period
Applied automatically — no action needed
Funded by scrapping the Digital ID programme
Why is Electricity VAT Being Cut?
Aimed to help with the cost of living in the UK, the six-month cut to household electricity VAT follows on from the £150 reduction in energy bills that was announced in the last Budget. The move should also help slow down inflation a little. It's expected to lower the Consumer Prices Index (CPI) (one measure of how fast prices are rising across the economy) by about 0.10 percentage points, and the Retail Prices Index (RPI) (another inflation measure) by about 0.14 percentage points.
Who it applies to
The 0% rate will apply to all domestic electricity supplies, which includes:
• Standard household electricity customers on any tariff type.
• Small businesses that qualify for domestic-rate energy relief
• Charities and residential care homes on reduced-rate energy supplies
Households on dual-fuel contracts will only see the VAT change on the electricity portion of their bill. Gas VAT will stay at 5%. Suppliers are expected to pass the full saving on to customers automatically, including those on fixed-rate deals, so there's no action required to receive it.
What is the Impact?
The impact will not be significant, with the Institute for Fiscal Studies calculating that the actual six-month saving for an average household will be around £25 per year. This is because VAT is calculated on top of wholesale and network costs, so a 5-point cut only shaves a small amount off a typical bill.
Furthermore, if the energy price cap rises again in October, part or all of the potential saving could be erased. Many experts believe the cap could be lifted ahead of winter, meaning the VAT cut would offset any price rises, rather than result in monthly savings.
The Key Facts around the 0% Electricity VAT Period
What's changing: VAT on domestic electricity bills drops from 5% to 0%.
When: From 1 October 2026 to 31 March 2027.
Estimated saving: Around £45 a year off the typical Ofgem price cap. However, the Institute for Fiscal Studies puts the actual six-month saving for an average household closer to £25.
Cost to the Treasury: Around £850 million for the 2026–27 financial year.
How it's funded: By cancelling the planned Digital ID programme, which had been expected to cost £1.8 billion over three years.
Where it applies: England, Scotland and Wales. Northern Ireland will receive equivalent funding via the Northern Ireland Executive.
Is It Still a Good Time to Compare Energy Deals?
The VAT cut applies to all household energy contracts, regardless of supplier, so savings can still be made by comparing electricity deals and making the switch. Industry changes like this can serve as a reminder to check your current energy bills and compare them against the market.
When comparing, remember, a fixed-rate tariff will protect against price cap rises from 1st October, while variable tariffs present more risk in terms of not knowing whether your energy bills will go up or down. Therefore, anyone approaching the end of a fixed deal is advised to compare options, since the VAT change alone won't offset a poor-value renewal.
What happens to Electricity Prices after March 2027?
The zero rate for household electricity VAT is set for this financial year only, and any decision to extend it will be announced in the Autumn Budget. However, to enable an extension, further funding would need to be identified, so it shouldn’t be assumed that the 0% rate will continue beyond 31 March 2027.
FAQs
Does the VAT cut apply to gas as well as electricity?
No. The 0% rate only applies to electricity. VAT on gas stays at 5%, so dual-fuel customers will only see the reduction on the electricity portion of their bill.
Do I need to do anything to get the discount?
No. Suppliers are expected to apply the VAT reduction automatically from 1 October 2026, including for customers on fixed-rate tariffs.
Will my bill definitely go down by £45?
The £45 figure is only the government's estimate of the annual effect on the typical Ofgem price cap; the Institute for Fiscal Studies estimates the actual six-month saving is closer to £25.
Glossary
VAT (Value Added Tax): A consumption tax added to most goods and services, including energy bills, currently 5% on domestic energy.
Ofgem price cap: The maximum a supplier can charge per unit of gas and electricity for a typical dual-fuel household on default rates, set periodically by the energy regulator.
Fixed tariff: An energy deal where the unit rate and standing charge stay the same for a set period, regardless of price cap changes.
Standing charge: A fixed daily fee on an energy bill, charged regardless of usage.
CPI/RPI: Consumer Prices Index and Retail Prices Index — the UK's two main measures of inflation.
Autumn Budget: The UK government's main annual fiscal statement, where major tax and spending decisions are confirmed.
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Page Last Reviewed: 22/07/2026