Prime Minister Andy Burnham has confirmed his first tax change since taking office, announcing a reduction in VAT on domestic electricity bills from 5% to 0%, effective from October 1. The move, revealed on Tuesday morning, aims to ease the cost of living crisis as winter approaches.
Details of the VAT Cut
The 5% VAT rate currently applied to household electricity will be eliminated, reducing typical annual bills by around £45. The government also expects the cut to lower inflation by one percentage point. The lost tax revenue will be offset by the cancellation of the Digital ID Programme.
Government Justification
Business Secretary Jonathan Reynolds stated that the announcement ensures “straight away when winter kicks in people have those heavier bills savings.” He described the policy as a “clear statement of intent” in tackling the cost of living crisis. Reynolds confirmed that the VAT change is funded for the remainder of the financial year, with any extension subject to the next Budget.
Funding and Implementation
The funding for this year comes from scrapping the Digital ID Programme, according to Reynolds. He noted that the £45 saving is “additional” to a £150 saving already expected for households. Reynolds expressed confidence that energy providers will be “very responsive” to the changes and stated he does not “anticipate any problems” with compliance, when asked about potential fines on BBC Breakfast.
Context
Burnham succeeded Sir Keir Starmer as Labour Party leader and Prime Minister on Monday after accepting King Charles III's invitation to form a government. This VAT cut is his first major tax policy move.
