Prime Minister Andy Burnham's plan to remove VAT on domestic electricity bills from October 1 will leave households facing an average annual charge of £1,861, according to forecasts from Cornwall Insight. The move, intended to ease the cost of living crisis, is expected to save consumers £45 over six months, but rising energy prices will largely offset the benefit.
VAT cut details and price cap forecast
From October 1, the government will scrap the 5% VAT on domestic electricity bills for six months. This reduction of 4.8% on electricity bills applies to all households, whether on the price cap or a fixed tariff. However, the energy price cap is predicted to rise by 3.1% on the same date, adding approximately £50 to annual bills for a typical dual-fuel household, or £25 over the six-month period of the VAT cut.
Cornwall Insight forecasts that the price cap will settle at £1,906 from October before the VAT cut, which then reduces it to £1,861. This means the net saving for households will be around £20 over the six months, according to financial expert Martin Lewis.
Martin Lewis analysis
Martin Lewis, founder of Money Saving Expert, commented: "The new Andy Burnham administration has just announced that from 1 October, for six months, it's going to get rid of VAT on domestic electricity bills. Now, this is good news. It means a saving, everything else remaining equal. But everything else isn't going to remain equal."
Lewis explained: "A cut in domestic electricity is a cut of 4.8% off all electricity bills. Whether you're on the Price Cap, whether you're on a fix, everybody's bills should be reduced. But the Price Cap, which is what 60% of people in England, Scotland and Wales are on – if you're on your company's standard tariff, you're on a Price Cap tariff – that moves every three months and of course, it's going to move on 1 October."
He added: "Now the prediction for the 1 October Price Cap is pretty tight right now, as we're most of the way through the assessment period. And it is likely to rise. The current prediction is 3.1%. So while you've got 4.8% coming off electricity bills, you've got 3.1% going onto gas AND electricity bills. That 3.1% is equivalent, over a year, to around £50. So let's do it for six months and say it's £25. So you've got £45 coming off bills, but £25 going onto bills. So on 1 October, it's looking like the actual saving over six months would be £20."
Further price cap increases expected
Lewis warned that the price cap is expected to rise again in January 2027 by about 2%, which could negate the remaining benefit of the VAT cut. "The Price Cap moves again in January, and currently the prediction is in January it'll be going up again by about 2%, although that's much more crystal ball gazing. If that were to happen, it would negate all the benefit of the VAT cut."
He stressed: "Now, we need to be straight. You are still saving compared to what you would have been in if this cut hadn't been made. But no one is really going to feel very much change in their pocket from this. It isn't a huge amount. So while I think it's a good totem, in practical terms it isn't enough to make you feel a change in energy bills."
Comparison with fixed deals and previous policies
Lewis also noted that market fluctuations have a greater impact than the VAT cut. "Just to put it into perspective, two weeks ago the cheapest fixed deal was 14% less than the Energy Price Cap. Now the cheapest fix is 8% less. That change is just because of what's going on in the Middle East, and it's a bigger factor than the VAT cut. So this is a small movement in something that varies a lot."
He praised the focus on electricity costs, saying: "What I am pleased to see, though, is the focus on electricity costs. Government policy is all about moving us towards electricity, so it's been perverse in recent years that relatively the price of gas has gotten lower while electricity has gone up. So at least there's some logical sense in there."
Comparing to previous government actions, Lewis added: "We also have to say that this is certainly a better start than when Starmer came in and their first consumer move was cutting the Winter Fuel Payment and moving it to a broken, means-tested system. This is a good totem, but for me it's only a totem."
