Chancellor Andy Burnham's £45 VAT cut on electricity bills will be effectively wiped out by a predicted rise in the Energy Price Cap, according to new forecasts. The Labour Prime Minister made the announcement on Tuesday ahead of updated predictions for the Price Cap between 1 October and 31 December 2026, which indicate a 5.1% increase, adding £93 annually to a typical bill.
Martin Lewis warns of net zero savings
MoneySavingExpert.com founder Martin Lewis commented on social media platform X: "I've just got the latest energy bill predictions. The average of three sources show the Price Cap rising 5.1% on 1 October – as the last week has seen very high wholesale rates. An annualised rise of £93 on a typical bill. If this happens, it will wipe out any household savings from the VAT cut during that Price Cap period (those on fixes will still see a 4.8% reduction)."
This means the £45 saving would be reduced to £0 for most households on standard variable tariffs, though those on fixed deals will still benefit from a 4.8% reduction. Households could still be worse off overall, but not as badly as without the cut.
VAT cut to be passed on by suppliers
Lewis confirmed that senior government sources indicated the VAT cut should be passed on by all firms on all tariffs, including fixes. He said: "This follows the precedent of the '£150 off bills' last April, so I don't expect energy firms to push back. So far British Gas, E.on Next and Octopus have confirmed they'll do it."
The VAT cut will be funded in part by scrapping the previous Prime Minister Sir Keir Starmer's digital ID project, which had been estimated to cost around £600 million a year over three years.
Burnham defends policy
Prime Minister Burnham said: "I said I wanted to give people breathing space, and that's what I'm announcing on my second day as Prime Minister. We're taking immediate action to cut taxes on energy bills, put more money in people's pockets and bring back hope."
Despite the VAT cut being offset by the price cap rise for most, the government maintains it provides relief compared to the scenario without the cut.
