From October 1, VAT on electricity bills is set to fall from 5% to zero, a flagship measure from Andy Burnham's new Labour government. The temporary cut is intended to ease the financial burden on households, but it is already being dismissed by critics as a “sticking plaster” that will do little to address the root causes of high energy costs.
The government has framed the VAT cut as a response to the pressing cost-of-living crisis, which has seen energy bills become a major burden for many families. However, the timing of the price cap rise threatens to undermine its impact.
Martin Lewis, the ITV and BBC consumer finance expert, has cautioned that the benefit of the VAT reduction will be “wiped out” by an upcoming rise in the energy price cap. According to Lewis, the cap is due to increase by 5.1% on the same date, adding £93 to a typical annual bill. With the VAT cut offering a predicted saving of £45, the net effect would leave households £48 worse off.
Martin Lewis: “People won’t feel much benefit”
Speaking about the VAT cut, Lewis said: “In practice people won’t feel much benefit.” He explained that the price cap rise, driven by high wholesale rates, would overtake any savings from the tax break during that period. However, he noted that those on fixed tariffs would still see a 4.8% reduction.
The figures have raised questions about the effectiveness of the government’s approach to the cost-of-living crisis, particularly as energy costs remain a major concern for households across the country.
Business leaders warn of “significant cost pressures”
The concerns are not limited to consumers. Allen Simpson, chief executive of UKHospitality, said businesses in the hospitality sector are facing “significant cost pressures” from energy, employment costs, and heavy taxes, which are directly affecting hiring decisions. “If the Government wants to unlock growth, job creation and investment, it needs to provide a sector-wide support that addresses the costs facing businesses,” Simpson said.
Ben Martin, energy policy manager at the British Chambers of Commerce, echoed that view, arguing that lower business energy costs would have a positive knock-on effect for the wider economy. “Lower business energy costs mean lower pressure on prices, more investment and a stronger economy,” he said.
The arrival of the VAT cut and the price cap rise on the same day creates a paradoxical situation, leaving many consumers uncertain about the net effect on their monthly outgoings. This uncertainty comes at a time when household finances are already under strain.
Manufacturers fear “life-threatening” energy costs
In the manufacturing sector, the stakes are even higher. Patrick Matthewson, energy and net zero policy lead at Make UK, revealed that 13% of manufacturers believe rising energy prices could be “life-threatening” to their operations. He warned that industry cannot deliver the growth the UK needs while burdened with some of the highest industrial energy costs in the developed world.
Tania Kumar, Energy Transition Director at the CBI, stressed that the cost-of-living crisis and the cost of doing business are two sides of the same coin. “Tackling the cost-of-living crisis goes hand in hand with tackling the cost of doing business,” she said.
Energy consultant brands VAT cut a “sticking plaster”
Energy consultant Kathryn Porter was more blunt, describing the VAT cut as a “sticking plaster” that fails to address the underlying causes of high energy bills. She argued: “To properly lower costs action must be taken on the true causes of high energy bills and that is net zero policies that force us to pay billions to subsidise inefficient weather dependent generation.”
Her comments point to a broader political debate over the cost of net zero policies, a theme that is likely to persist as the government seeks to balance climate ambitions with economic realities.
Financial confidence remains fragile
Meanwhile, Kevin Mountford, co-founder of savings platform Raisin UK, said the VAT cut might be welcome as a gesture of support, but underlined that households are still anxious about their finances. He cited the company’s 2026 Money Confidence Index, which found that over half of Britons feel stressed about their finances, and nearly half are not confident or only slightly confident about planning for the future.
“Greater clarity around tax, public spending and the government’s economic priorities will therefore be important. Prolonged uncertainty risks making it even harder for people to feel confident about their financial decisions,” Mountford said.
The mixed reaction to the VAT cut highlights the difficult path facing Andy Burnham’s government. While the measure offers a small reprieve, many argue it does not go far enough to tackle the structural drivers of high energy costs, nor does it provide the support that businesses desperately need. With the price cap set to rise on the same day the VAT cut takes effect, the promised relief may fail to materialise for millions of households.
