Martin Lewis, 54, has warned that Prime Minister Andy Burnham's newly announced VAT cut on domestic electricity bills may only result in a net saving of around £20 for households. The Money Saving Expert founder spoke out after Burnham confirmed the electricity tax rate cut on Tuesday, which will remove VAT on domestic electricity bills for six months from 1 October.
How the VAT cut works
Lewis explained that cutting VAT on domestic electricity amounts to a 4.8% reduction off all electricity bills, regardless of whether customers are on the Price Cap or a fixed tariff. However, he cautioned that the Price Cap, which covers around 60% of households in England, Scotland and Wales, is set to rise on 1 October.
"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," Lewis said on his way to a TV show. "Now, this is good news. It means a saving, everything else remaining equal. But everything else isn't going to remain equal."
Price cap rise offsets savings
According to Lewis, the current prediction for the 1 October Price Cap is a rise of 3.1%, which would add around £50 to annual bills, or £25 over six months. This means the £45 VAT saving is partially offset, resulting in a net gain of approximately £20 over the six-month period.
"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," Lewis stated.
Future price cap movements
Lewis also highlighted that the Price Cap moves again in January, with predictions of a further 2% increase, which could negate the entire benefit of the VAT cut. "If that were to happen, it would negate all the benefit of the VAT cut," he warned.
Despite this, Lewis acknowledged that households are still better off compared to if the cut had not been made. "But no one is really going to feel very much change in their pocket from this. It isn't a huge amount," he said. "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
Lewis noted that two weeks ago, the cheapest fixed energy deal was 14% less than the Price Cap, but that has now narrowed to 8% less due to events in the Middle East. "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 added.
Positive focus on electricity costs
Lewis welcomed the government's focus on electricity costs, noting that government policy aims to move households towards electricity, yet gas prices have become relatively cheaper while electricity has risen. "So at least there's some logical sense in there," he said.
He also contrasted Burnham's move with the previous government's decision to cut the Winter Fuel Payment. "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," Lewis remarked. "This is a good totem, but for me it's only a totem."
