From 1 October 2026, the 5 per cent VAT on household electricity is being scrapped entirely — cut to zero for six months, until 31 March 2027. The new Prime Minister, Andy Burnham, says it will take around £45 off a typical household’s yearly electricity costs. It is a full removal of VAT on electricity only (gas still carries 5 per cent), it is temporary, and suppliers are expected to pass it on automatically. The catch: the Ofgem price cap is forecast to rise in October at the same time, so most households will feel far less than £45 — the real net saving over the six months is nearer £20.
What has actually been announced
In one of his first acts as Prime Minister, Andy Burnham used his opening cabinet meeting to promise a “cost-of-living government” and confirm a temporary cut to VAT on household electricity. Domestic energy in the UK is taxed at a reduced VAT rate of 5 per cent — far below the 20 per cent standard rate — and from 1 October 2026 that 5 per cent will be removed from electricity altogether, taking the rate to zero.
Three details matter and are easy to miss. First, it is a full removal of the VAT on electricity, not a trim — the rate goes from 5 per cent to nothing. Second, it applies to electricity only; the gas side of your bill keeps its 5 per cent VAT. Third, it is temporary: the zero rate runs for six months, from 1 October 2026 to 31 March 2027, with any extension to be decided at the Budget. The Treasury puts the cost at roughly £850 million for the year, funded by cancelling the planned Digital ID programme.
The framing from Downing Street is deliberately about “breathing space” rather than a permanent reform. Cutting VAT is one of the few energy levers a government can pull quickly, because it does not require renegotiating supply contracts or waiting for wholesale markets to move — it simply lowers the tax applied to the electricity you already buy. That speed is the political appeal. The downside, as we will see, is that a fast tax tweak does nothing about the wholesale gas prices that actually set the level of the cap, so the relief it delivers is real but limited.
What 5 per cent VAT costs you now
To see where the £45 comes from, it helps to split a typical dual-fuel bill. Under the July 2026 price cap of £1,862 a year, the electricity portion for a typical household works out at roughly £900 a year once you add the unit rate (26.11p per kWh) and the daily standing charge. Because that £900 already includes 5 per cent VAT, the tax itself is worth around £45 — and that is precisely the figure being removed.
Put another way, cutting VAT on electricity is a straight 4.8 per cent reduction on the electricity part of your bill. It does nothing for the gas you burn to heat your home and hot water, which is the larger cost for most households over winter and the part that has risen fastest.
Your own saving will scale with how much electricity you use. A low-usage flat with modest lighting and appliance demand might see nearer £30 removed; a larger family home, or one that heats water or space with electricity, could see more than £45. Households with an electric vehicle, an electric heat pump or electric heating stand to gain the most, because a bigger share of their total energy spend is electricity in the first place — the very households the tax cut treats most generously, and part of why the IFS questions how well it is targeted.
| Part of your bill | VAT before 1 Oct 2026 | VAT from 1 Oct 2026 |
|---|---|---|
| Electricity | 5% | 0% (removed) |
| Gas | 5% | 5% (unchanged) |
| Typical yearly VAT saved (electricity) | — | ~£45 |
Why you may not feel the full £45
Here is the part the headline £45 leaves out. The VAT cut lands on exactly the same day the Ofgem price cap changes, and the cap is forecast to rise this October, not fall. Cornwall Insight, the analyst the industry watches, expects the October cap to climb as wholesale gas stays elevated. So while the VAT cut pulls your electricity costs down by around £45 a year, the cap rise pushes your overall energy costs back up at the same moment.
Martin Lewis has done the arithmetic bluntly: “you’ve got £45 coming off bills, but £25 going onto bills. So on 1 October, it’s looking like the actual saving over six months would be £20.” He also warns that a further forecast rise in January could “negate all the benefit of the VAT cut” entirely. His verdict is that the policy is “a good totem” but “in practical terms it isn’t enough to make you feel a change in energy bills.”
What the experts are warning
The measure has had a mixed reception. The Institute for Fiscal Studies (IFS) argues electricity is a poorly chosen target. Its Helen Miller points out that “electricity prices have changed little since the start of the war in Iran” — up about 5 per cent — whereas gas, the fuel driving bills higher, has risen around 24 per cent. Because the cut lands on electricity, the IFS says “a disproportionate share of the cost of today’s tax cut will go to higher-income households who use more electricity.”
The IFS also flags a tidiness problem: taxing gas at 5 per cent while zero-rating electricity is a “move towards a more complex tax system”, and it questions the funding, noting the £850 million cost this year leaves a gap to fill. None of this means the cut is worthless — a saving is a saving — but it is a modest, temporary gesture rather than a fix for the underlying problem of high wholesale energy costs.
Do you need to do anything to get it?
No. Every energy supplier is expected to apply the VAT removal automatically from 1 October 2026, so you do not need to switch tariff, phone your supplier or fill in a form to receive it. It arrives as a slightly lower unit rate on the electricity side of your bill. The one sensible housekeeping step is to submit a meter reading close to 1 October, so you are billed correctly on either side of the change rather than having usage estimated across the boundary.
It is also worth remembering this VAT cut comes on top of the £150 already removed from bills at the last Budget — so the direction of travel is downward pressure on the tax and levy side, even as wholesale costs keep the underlying cap high.
One practical warning: because the change is temporary, do not build it into your long-term budget as if it were permanent. If the zero rate is not extended at the Budget, the 5 per cent VAT returns to electricity from 1 April 2027, and your electricity costs would step back up by roughly the same £45 a year at that point. Treat the six-month window as a short reprieve, and use the tips below to lock in savings that outlast it.
How to save more than the VAT cut gives you
If the real net saving is around £20 over six months, the bigger wins are still in your own hands. A few of the highest-impact moves before winter:
- Check whether a fixed deal beats the cap. If a fix is priced at or just below the current cap, it protects you from the forecast October and January rises for the length of the deal.
- Target your biggest electricity users — tumble dryers, older fridges and always-on devices — and wash at 30°C. This is where the zero-rated electricity saving compounds.
- Turn your combi boiler flow temperature down to 55–60°C. It cuts gas use noticeably with no loss of comfort — and gas is the part VAT is not being removed from.
- Draught-proof doors, letterboxes and floorboards; it is cheap and pays back fast on lost heat.
- Pay by direct debit where possible; it is cheaper than paying on receipt of bill for most tariffs.
- Check whether you qualify for the Warm Home Discount or a supplier hardship fund if bills are a genuine struggle — these are worth far more than £45.
Get ahead of the October changes
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Because the VAT cut and the price cap change land together, the only way to know your true position is to run your own figures rather than trusting the headline. Our full guide to cutting energy bills in 2026 walks through room-by-room savings, and our breakdown of the October 2026 price cap forecast shows exactly how much the cap is expected to move against this VAT saving. To see the tax portion of your own electricity spend in seconds, drop your annual electricity cost into our free VAT calculator and it will show you what the 5 per cent removal is actually worth to you.
Frequently Asked Questions
When does the VAT cut on electricity start?
The 5 per cent VAT on household electricity is removed from 1 October 2026 and the zero rate runs for six months, until 31 March 2027. Any extension beyond that will be decided at the Budget.
Is it a full removal of VAT or just a cut?
It is a full removal on electricity: the rate goes from 5 per cent to zero. It applies to electricity only — gas keeps its 5 per cent VAT — and it is temporary rather than permanent.
How much will I actually save?
The government quotes around £45 a year off a typical household’s electricity costs. But because the Ofgem price cap is forecast to rise in October at the same time, the real net saving over the six months is closer to £20 for a typical household. Your figure depends on how much electricity you use.
Does the cut apply to gas as well?
No. Only electricity is being zero-rated. Gas continues to carry 5 per cent VAT, which is one of the main criticisms of the policy, since gas is the fuel whose price has risen most.
Do I need to do anything to get the saving?
No. Suppliers are expected to apply the VAT removal automatically from 1 October 2026 as a lower electricity unit rate. It is worth submitting a meter reading close to that date so your usage is billed correctly on either side of the change.
Will this stop my energy bills going up?
Not on its own. Analysts including Cornwall Insight expect the October price cap to rise as wholesale gas stays high, and Martin Lewis warns a further forecast rise in January could cancel out the VAT saving entirely. It softens the increase rather than reversing it.
Last reviewed: July 2026. This article is for general information only and does not constitute financial advice. Figures for the price cap and the net effect of the VAT cut are estimates and forecasts that may change — always check gov.uk, ofgem.gov.uk and your own supplier for the latest confirmed rates.
