VAT on household electricity bills will be cut from 5% to 0% from 1 October 2026 until 31 March 2027, removing around £45 a year from the Ofgem price cap. The measure, announced on 21 July 2026, costs an estimated £850 million in 2026-27 and is funded by cancelling the £1.8 billion Digital ID programme.
TL;DR · LAST REVIEWED 21 July 2026
- VAT on domestic electricity drops from 5% to 0% from 1 October 2026 to 31 March 2027, in time for the next Ofgem price cap.
- The cut is worth around £45 a year on the price cap, on top of the £150 removed from bills at the last Budget.
- It is funded for 2026-27 by cancelling the £1.8 billion Digital ID programme, at an estimated cost of £850 million.
- All suppliers are expected to pass the reduction on to all customers, including those on fixed tariffs.
- Northern Ireland households will be supported through comparable funding to the NI Executive because EU VAT rules still apply there.
- The Treasury estimates the cut will reduce CPI inflation by around 0.10 percentage points.
Electricity VAT cut at a glance
| VAT rate on domestic electricity | 5% now, 0% from 1 October 2026 to 31 March 2027 |
| Typical annual saving | Around £45 off the October Ofgem price cap |
| Combined with last Budget measure | Around £195 a year (£45 + £150) |
| Cost to the Exchequer, 2026-27 | Around £850 million |
| Funding source | Cancelled Digital ID programme (£1.8bn over three years) |
| Inflation impact | CPI down ~0.10pp, RPI down ~0.14pp |
| Northern Ireland | Comparable funding to the NI Executive (EU VAT rules apply) |
KEY FACTS
- The VAT cut takes effect from 1 October 2026, timed to feed directly into the next Ofgem price cap.
- It applies to domestic electricity only, not gas, which keeps the cost at around £850 million for 2026-27.
- Small businesses on domestic energy VAT relief, charities and residential care homes on the reduced rate also benefit.
- Any longer-term funding decisions will be made at the Budget alongside an OBR forecast, under the fiscal rules.
- Suppliers are expected to pass the cut on to every customer, including fixed-tariff households.
What has the new Prime Minister announced on electricity bills?
In one of his first acts in office on 21 July 2026, Prime Minister Andy Burnham announced that VAT on household electricity bills will be removed entirely from 1 October 2026, cutting the rate from 5% to 0% and taking around £45 a year off the Ofgem price cap.
The announcement came on the Prime Minister's second day in office and follows his commitment on the steps of Downing Street to give households what he called breathing space on the cost of living. The mechanism is deliberately simple: rather than a new grant, rebate or supplier obligation, the government is using the tax system itself, zeroing the 5% reduced rate of VAT that has applied to domestic energy since 1997. Because VAT is charged on the final bill, removing it flows through automatically once suppliers update their billing systems, and the government has timed the change to land on 1 October 2026 so that it feeds directly into the next Ofgem price cap period. Chancellor John Healey confirmed the measure is fully funded for the current financial year and framed it as both a household support measure and an anti-inflation tool, since a lower cap level mechanically reduces the measured rate of consumer price inflation. Any decisions about extending the policy beyond 2026-27, or widening it to gas, have been explicitly deferred to the Budget, where they will be scored against an Office for Budget Responsibility forecast.
How much will households actually save?
The Treasury estimates the VAT cut will remove around £45 from the yearly Ofgem price cap in October 2026. Combined with the £150 taken off energy bills at the last Budget, direct government action is now worth roughly £195 a year against a typical dual-fuel bill.
The £45 figure is an estimate based on the electricity portion of the price cap for a typical household, so individual savings will vary with usage. A household that uses more electricity than the Ofgem typical consumption values, for example one with an electric vehicle, a heat pump or storage heaters, will save proportionately more, because VAT is charged on every unit consumed as well as the standing charge. Conversely, low-usage households will see a smaller cash benefit, although the percentage saving on their bill is identical at 5% of the pre-VAT electricity cost. It is worth being clear about what the cut does not do: it does not reduce the underlying wholesale, network or policy costs that drive the cap, and it does not apply to gas, which still carries VAT at 5%. The government's stated reason for targeting electricity is that it reaches more households, including the growing number without a gas connection, and supports the poorest households, who spend a higher share of income on energy. The final cash impact will only be confirmed when Ofgem publishes the October cap level in late August.
How does the VAT cut interact with the Ofgem price cap?
Because the price cap is quoted inclusive of VAT, zeroing the 5% rate from 1 October 2026 directly lowers the published cap figure by around £45 for a typical household, separate from any movement in wholesale energy costs.
The Ofgem price cap is recalculated quarterly and the October level, covering 1 October to 31 December, is normally announced in late August. That announcement will be the first to reflect the VAT change, and it creates an unusual reading challenge: the headline cap could rise, fall or hold flat depending on wholesale prices, while still being £45 lower than it would otherwise have been. Households comparing the August announcement against the current cap should therefore separate the tax effect from the market effect before judging whether energy costs are genuinely easing. There is also a pass-through question for the roughly one in three households on fixed tariffs, which sit outside the cap. The government has stated that it expects all suppliers to pass the VAT reduction on to all customers, including those on fixes, as they did with the £150 removed at the last Budget. Fixed-tariff customers should check their October statements to confirm the VAT line has dropped to 0%, and challenge their supplier if it has not, since VAT is charged at the rate in force on the date of supply rather than the date the contract was agreed. Prepayment meter customers are covered automatically: prepayment tariffs sit inside the Ofgem price cap, so the zero rate flows through to unit rates and standing charges from 1 October 2026 without any action needed, whether on a smart or legacy key and card meter.
Who benefits beyond ordinary households?
The zero rate extends to small businesses that qualify for domestic energy VAT relief and are not VAT-registered, plus charities and residential care homes currently eligible for the 5% reduced rate, alongside every domestic electricity customer in Great Britain.
The reduced 5% rate on energy has never been limited strictly to private homes. Under existing de minimis and qualifying-use rules, very small businesses with low electricity consumption, charities using energy for non-business purposes, and residential accommodation such as care homes, hospices and monasteries already pay the domestic rate rather than the standard 20%. The press release confirms these groups move to 0% along with households, which matters for the care sector in particular, where energy is a significant and rising overhead against fixed local-authority fee rates. For a mid-sized residential care home consuming well above household levels, the saving will run to several hundred pounds a year. Standard-rated business users see no change: commercial electricity remains at 20% VAT, and VAT-registered businesses that reclaim their input VAT are unaffected either way. Landlords with all-inclusive rents and heat network operators supplying domestic customers will also need to reflect the new rate in their charging from 1 October, and tenants on such arrangements should reasonably expect the benefit to be passed through.
Why is Northern Ireland treated differently?
EU VAT rules still apply to goods, including electricity, in Northern Ireland under the terms of the UK's EU exit, so the zero rate cannot be applied there without EU agreement. Instead, the NI Executive will receive comparable funding to support households directly.
This is one of the more consequential details buried in the announcement. Because electricity is treated as a good under the Windsor Framework arrangements, Northern Ireland remains bound by the EU VAT Directive, which sets a floor on rates for energy unless a derogation is agreed. Rather than wait for negotiations with Brussels, the government has chosen to route equivalent money through the NI Executive so that Northern Irish households receive the same support on the same timetable as the rest of the UK. What that support looks like in practice, whether a bill credit, a payment scheme or a supplier-level subsidy, will be for Stormont to design, and the mechanism chosen will determine how quickly the money reaches households and whether it appears automatically on bills or requires a claim. Households in Northern Ireland should watch for an announcement from the Executive and their supplier rather than expecting the VAT line on their bill to change on 1 October. The precedent also matters for any future decision to zero-rate gas, which would face the same constraint.
How is the cut funded and what does it signal for the Budget?
The 2026-27 cost of around £850 million is funded by cancelling the Digital ID programme, which was budgeted at £1.8 billion over three years. Funding beyond this financial year will be decided at the Budget, alongside an OBR forecast and within the fiscal rules.
The funding choice is as political as it is fiscal. Scrapping Digital ID delivers an immediate, identifiable saving that covers the first year of the VAT cut with headroom to spare on paper, although the £1.8 billion was spread over three years and partly depended on reprioritisation within existing departmental budgets, so the arithmetic is not a straight one-for-one swap. The more important signal is what has been deferred: the press release is explicit that any further action, including funding the VAT cut beyond March 2027, will be taken at the Budget and scored by the OBR. That leaves open three scenarios worth watching. The cut could be made permanent and funded through other measures, it could be extended to gas at a substantially higher cost, or it could in principle lapse after one year, which would mean a £45 rise in the April or October 2027 cap. The Treasury's own inflation estimates, a reduction of around 0.10 percentage points on CPI and 0.14 on RPI, also give the Bank of England marginally more room on rates, a second-order effect for mortgage holders that may prove as valuable as the bill saving itself.
What households should do before 1 October 2026
- Note the late-August Ofgem announcement of the October price cap: the published figure will already include the VAT cut.
- If you are on a fixed tariff, check your first October statement to confirm the VAT line shows 0% and query your supplier if it does not.
- Compare fixes carefully: quotes issued before October may still price VAT at 5%, so confirm whether the zero rate is reflected.
- In Northern Ireland, wait for the NI Executive scheme details rather than expecting the bill VAT line to change on 1 October.
- Submit a meter reading close to 1 October if you are not on a smart meter, so usage is billed at the correct rate either side of the change.
- If you receive an all-inclusive rent or heat network supply, ask how the reduction will be passed through to you.
RELATED GUIDES
DISCLAIMER
This article is editorial information, not financial advice. Kael Tripton Ltd is not authorised or regulated by the Financial Conduct Authority. Figures were correct at the last review date shown above; verify current rates and rules with the primary sources listed below before acting.
Frequently asked questions
When does VAT come off electricity bills?
From 1 October 2026. The rate on domestic electricity falls from 5% to 0%, timed to take effect with the next Ofgem price cap period covering October to December 2026.
How much is the electricity VAT cut worth?
Around £45 a year off the Ofgem price cap for a typical household, according to HM Treasury estimates. Households using more electricity than average will save more, since VAT applies to every unit and the standing charge.
Does the VAT cut apply to gas bills?
No. The zero rate applies to domestic electricity only. Gas continues to carry VAT at the 5% reduced rate, and any change would be a separate decision at a future Budget.
Will fixed tariff customers get the VAT cut?
Yes. The government has stated it expects all suppliers to pass the reduction on to all customers, including those on fixed tariffs, as happened with the £150 removed from bills at the last Budget. Check your October statement to confirm.
Why do Northern Ireland bills not change on 1 October?
EU VAT rules still apply to electricity in Northern Ireland, so the zero rate cannot be applied there without EU agreement. The NI Executive will instead receive comparable funding to support households through its own scheme.
SOURCES
- GOV.UK: New PM cuts tax on household electricity bills – accessed 21 July 2026
- Ofgem: Energy price cap – accessed 21 July 2026
- HM Treasury – accessed 21 July 2026
- Office for Budget Responsibility – accessed 21 July 2026
