Andy Burnham is considering removing the 5% VAT charged on domestic energy bills, a change estimated to cut around £130 a year from a typical household bill. Wider proposals include moving older renewable projects onto fixed-price contracts and an affordable energy guarantee for every household. |
LAST REVIEWED: 19 JULY 2026
KEY FACTS
- Removing 5% VAT from domestic energy is estimated to save around £130 a year for a typical household
- Older renewable generation could be moved onto fixed-price contracts to cut wholesale-linked costs
- An affordable energy guarantee would give every household access to a cheaper baseline tariff
- Octopus Energy has urged a wider electricity market overhaul it says could cut bills by £189
- Trade bodies want some policy costs moved from electricity bills into general taxation
Cutting household energy costs has moved to the centre of the new government's early agenda, with Andy Burnham considering a package of reforms that could reshape how bills are calculated. The measures under consideration include removing the 5% VAT currently charged on domestic gas and electricity, shifting older renewable generation projects onto fixed-price contracts so consumers stop paying wholesale-linked premiums for power that is cheap to produce, and introducing what has been described as an affordable energy guarantee. Taken together, early estimates suggest the changes could reduce a typical annual household bill by around £130, though the final design and timing of any package remain to be confirmed.
The VAT element is the most straightforward of the three ideas. Domestic energy has carried a reduced 5% VAT rate for years, and removing it entirely would flow through to bills immediately once legislated. Because VAT is charged as a percentage of the bill, households with higher consumption would see larger cash savings, while the benefit for low-usage households would be smaller in absolute terms. The Treasury cost of the change, and how it would be funded, has not been set out.
The proposal to move older renewable projects onto fixed-price contracts targets a structural quirk of the electricity market. Many early wind and solar schemes receive support under legacy arrangements that leave consumers exposed to wholesale prices even when generation costs are low. Converting these to contracts for difference style fixed prices would lock in cheaper power for billpayers, though generators would need to agree terms and the transition is expected to take time.
Industry pressure is building in the same direction. Octopus Energy has publicly urged the incoming administration to go further with a wider overhaul of the electricity market that it says could cut bills by £189, while warning the reforms would take around two years to deliver. Separately, the Nuclear Industry Association and other trade bodies have written to Burnham arguing that electricity prices have become a barrier to economic growth, and urging him to consider paying some energy policy costs through general taxation rather than through standing charges and unit rates on electricity bills.
The energy package sits alongside a broader cost of living push. Burnham is also expected to announce lower bus fares, plans concerning public ownership of water and energy companies, and a large council house building programme. Reports also indicate the government intends to drop the previous administration's compulsory digital ID scheme to concentrate on cost of living measures. For households, the practical takeaway is that no change has yet taken effect: bills remain governed by the current Ofgem price cap arrangements until any reform is legislated, and any VAT change would appear on bills only after implementation.
Households looking to manage costs in the meantime retain the usual options: checking whether a fixed tariff undercuts the current price cap rate, submitting regular meter readings, and reviewing eligibility for support schemes such as the Warm Home Discount ahead of the winter period. Any confirmed changes to VAT or tariff structures will be reflected in supplier communications and Ofgem guidance once enacted.
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Disclaimer
This article is for general information only and reflects sources available at the time of the last review date shown above. It is not financial, legal or travel advice. Details can change quickly during live incidents; always confirm the current position with the official body concerned before acting.
How much could removing VAT save on energy bills?
Early estimates put the saving at around £130 a year for a typical household, based on removing the 5% VAT rate currently applied to domestic gas and electricity. Actual savings depend on consumption, since VAT is charged as a percentage of the bill.
What is the affordable energy guarantee?
It is a proposal under consideration that would give every household access to a cheaper baseline energy tariff. Full details of how it would work, who would fund it and when it might start have not yet been published.
Has VAT on energy bills already been removed?
No. The 5% VAT rate still applies to domestic energy. The removal is a proposal under consideration and would require legislation before it appears on bills.
What has Octopus Energy proposed?
Octopus has urged a wider overhaul of the electricity market that it estimates could cut household bills by £189, while warning the changes would take around two years to deliver.
Does this affect the Ofgem price cap?
Not yet. The price cap continues to operate as normal. Any reform to VAT, renewable contracts or tariff structures would interact with the cap only once legislated and implemented.
