As part of new Prime Minister Andy Burnham’s plan to offer help with the cost of living, the government has announced that VAT will be deducted from household electricity bills.
The 5% VAT cut will come into effect from October 1, saving a typical household around £45 a year.
Ministers said it would be funded by savings from scrapping the digital ID programme, which would cost £1.8 billion over the next three years. The government said the announcement is expected to cost £850m this financial year.
New Chancellor John Healey said the announcement would “provide some reassurance this winter”.
Suppliers have been told that the benefits of the VAT cut should be passed on to all domestic customers, including those on fixed tariffs, as was the case when some charges were removed from bills in April.
The government said the cuts would take effect in England, Scotland and Wales, but equal funding would be given to Northern Ireland, which is regulated differently.
Small businesses that qualify for home energy VAT relief and are not registered for VAT, as well as charities and residential care homes eligible for the reduced rate, will also benefit.
VAT reduction is a relatively basic tool for reducing energy bills – larger homes are likely to make greater savings as they use more electricity.
However, some vulnerable homes are also high power users, such as to run medical equipment.
The announcement comes a day after Burnham became Britain’s seventh prime minister since 2016, pledging to “bring hope back” to Britain.
Former Defense Secretary Healey was made chancellor as part of Burnham’s cabinet appointments on Monday.
She replaces Rachel Reeves, who had served as Sir Keir Starmer’s chancellor since Labour’s landslide 2024 election victory.
Burnham’s new cabinet is due to meet for the first time at lunchtime on Tuesday.
