The Policy Change
On 21 July 2026, the UK government announced that VAT on domestic electricity bills will be removed from 1 October 2026. The move is part of cost-of-living support measures and is funded by cancelling the Digital ID programme. (gov.uk)
The VAT rate will drop from 5% to 0% for domestic electricity bills, to help households facing high energy costs, particularly those on low incomes. (gov.uk)
Who Benefits Most?
| Household type | Approximate saving |
|---|---|
| Low-income family using electricity predominantly for heating, lighting, cooking | Largest proportional savings – energy makes up big share of usual costs |
| Households on fixed or capped tariffs | All eligible supply types should pass on the VAT cut, including fixed tariffs |
| Charities / residential care homes / small business suppliers eligible for domestic energy VAT relief | Also benefit from the change where applicable |
Cost & Funding
- Estimated cost in the 2026-27 tax year: £850 million.
- Funding: by cancelling the Digital ID programme, which was originally budgeted at £1.8 billion over three years. All funding is from existing budgets by reprioritisation. (gov.uk)
Example Impact
If Mary’s annual electricity bill is £600 (inclusive of 5% VAT), after removal she would pay £600 ÷ 1.05 = ~£571.43, saving about £28.57 per year. While modest per individual household, when aggregated across millions, these savings are substantial.
Another example: A household with high usage (£1,200 bills) saves about £57.14 per year.
Broader Implications
- Helps reduce inflationary pressure since energy costs feed into wider economy.
- Likely to reduce fuel poverty and ease financial strain for vulnerable households.
- Signals shift in fiscal policy towards targeted relief over across-the-board cuts.
Lessons for Policymakers & Advocates
- Targeted VAT changes can deliver real relief but must be carefully implemented — ensuring suppliers pass on savings is vital.
- Even small VAT rates (5%) compound over bills; zero rating is more impactful.
- Communication to consumers is key so people understand change and are aware to look for lower cost option or billing adjustments.