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VAT Removed From Household Electricity Bills
Announced 21 July 2026 — in effect 1 October 2026 to 31 March 2027 — VAT on domestic electricity bills is being cut from 5% to 0% for six months over winter, expected to take around £45 off the average annual price cap. The government says it will cost roughly £850m and is funding it by cancelling the previous government's Digital ID programme — though only about £600m of identified savings from that cancellation have been confirmed so far, leaving a gap the opposition has flagged.
5% → 0%
VAT rate on electricity
£45
Estimated saving off annual price cap
£850m
Cost to the Exchequer, 2026/27
How this actually works
Domestic energy in the UK is already taxed at a reduced 5% VAT rate rather than the standard 20% — a lower rate has applied to household gas and electricity since VAT on domestic fuel was first introduced in 1994. This cut takes that reduced rate down to 0% entirely, but only for six months, timed deliberately to land alongside an expected autumn rise in Ofgem's quarterly price cap — so for most households, the saving will partially offset a bill increase that was coming anyway, rather than showing up as a straightforward reduction on top of a flat bill. The government expects and requires suppliers to pass the full VAT reduction through to customers, including those already locked into a fixed tariff, following the same approach used for a previous £150 energy support scheme.
The numbers
5% → 0%
VAT rate on electricity
£45
Estimated saving off annual price cap
£850m
Cost to the Exchequer, 2026/27
29m
Households expected to benefit
£1.8bn
Digital ID programme cost being cancelled (3yr)
£250m
Funding gap flagged by opposition
−0.10pp
Estimated effect on CPI inflation
1994
Year reduced 5% VAT on domestic fuel began
Timeline
1994
VAT on domestic fuel (including electricity) is first introduced in the UK at a reduced 5% rate, rather than the standard rate — this reduced rate is the one now being temporarily cut to 0%.
Ahead of the 2024 Labour conference
The previous government under Keir Starmer proposes a Digital ID programme, intended to make digital identity verification mandatory for right-to-work checks as part of a crackdown on illegal migration.
Through 2025
The Digital ID plan draws sustained civil liberties criticism — campaign group Big Brother Watch calls it "wholly unBritish" and warns of a "domestic mass surveillance infrastructure"; a petition against mandatory digital ID reaches 2.9 million signatures by October 2025.
January 2026
The government backs down on making digital ID compulsory, confirming other forms of identification would remain acceptable for right-to-work checks — a significant softening of the original plan.
Late 2025
The Office for Budget Responsibility publishes its Economic and Fiscal Outlook, putting a provisional total cost on the Digital ID programme of £1.8bn over three years (split roughly £0.5bn resource and £1.3bn capital spending) — but flags that no specific savings had yet been identified to fund it, and its own annual costing is closer to £0.6bn.
20 July 2026
Andy Burnham becomes Prime Minister, pledging "breathing space" on the cost of living in his first speech outside No 10.
21 July 2026
The government announces VAT will be cut from 5% to 0% on domestic electricity bills from 1 October 2026 to 31 March 2027, funded by cancelling the Digital ID programme entirely.
21 July 2026
HM Treasury confirms the cut is estimated to cost around £850m in 2026/27 and will reduce CPI inflation by roughly 0.10 percentage points and RPI by around 0.14 points.
21 July 2026
Conservative leader Kemi Badenoch criticises the funding approach, noting the Digital ID programme had not actually been budgeted or spent yet, calling it using "funding from an unfunded programme."
Who it actually helps
All 29 million billed households
A flat-rate VAT cut applies universally to anyone paying an electricity bill, regardless of income — the government says suppliers are expected to pass the full reduction on, including to customers on fixed tariffs.
Higher-usage households
Because it is a percentage cut rather than a fixed sum, households using more electricity save more in cash terms than low-usage households, even though the discount rate is identical for everyone — this makes it structurally less targeted at low-income households than a flat per-household payment would be.
Households facing the autumn price cap rise
The cut's October start date is timed to land alongside an expected increase in Ofgem's price cap, partially offsetting it rather than adding a separate saving on top of a flat bill — meaning the real-terms benefit for most households will be smaller than the headline £45 figure once the price cap change is netted off.
People who would have been affected by mandatory Digital ID
A less direct but real beneficiary group: anyone concerned about the civil liberties implications of the cancelled scheme — including the 2.9 million people who signed a petition against it — gets that specific policy shelved as a side effect of this funding decision, regardless of their view on the electricity VAT cut itself.
What's being given up to pay for it
The funding source is the cancelled Digital ID programme, which had been budgeted at £1.8bn over three years. However, the Office for Budget Responsibility had noted only around £600m of that had firm identified savings — meaning the £850m needed for the electricity VAT cut is roughly £250m short of confirmed savings from the programme being scrapped, a gap the opposition has explicitly raised. The government says the remainder will come from reprioritisation within existing budgets, with fuller costings confirmed at the Budget. Separately, whatever the previous government's stated goals for Digital ID were — primarily assisting right-to-work checks as part of an illegal migration crackdown — those goals will not now be pursued through this route, regardless of one's view on whether that scheme was a good idea in the first place.
Reactions
Andy BurnhamPrime Minister
“Westminster has not been working for people for too long, with families struggling with the cost of living.”
Kemi BadenochConservative Party Leader
“You can't use the funding from an unfunded programme to pay for cheaper bills.”
Big Brother WatchCivil liberties campaign group, on the cancelled Digital ID scheme itself
“The mandatory digital ID plans were wholly unBritish and would have created a domestic mass surveillance infrastructure.”
Where things stand
The VAT cut is confirmed to begin 1 October 2026 and run to the end of the financial year in March 2027. Full, finalised costings are due to be set out at the Budget, at which point the precise funding picture — including whether the £250m gap identified by the OBR is closed — should become clearer. We'll update this page once that detail is confirmed.
Figures and quotes sourced from government press releases, HM Treasury, the Office for Budget Responsibility, and contemporary news coverage. This is a fast-moving story — costings marked "provisional" may change at the Budget, and we'll update this page as they do. We've aimed to separate confirmed facts from stated positions throughout; NewsDeck's own editorial opinion on this policy, if we have one, lives separately in The Editor's Take, clearly labelled as opinion.