Andy Burnham has scrapped VAT on household electricity bills from October in his first major measure to tackle the cost of living crisis since becoming prime minister.
The government said the cut will save the typical household £45 a year from 1 October by cutting VAT on domestic electricity from 5 per cent to zero.
Unveiling the policy on his first full day in office, Mr Burnham said the tax cut would give families “breathing space” after years of pressure from rising living costs.
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“Westminster has not been working for people for too long, with families struggling with the cost of living,” he said.
“That needs to change. I said I wanted to give people breathing space, and that’s what I’m announcing on my second day as prime minister. We’re taking immediate action to cut taxes on energy bills, put more money in people’s pockets and bring back hope.”
The announcement marks the first major economic intervention by the new Labour government following Mr Burnham’s arrival in Downing Street on Monday, when he pledged to tackle the cost of living crisis, bring key utilities back into public ownership and end rough sleeping.
Here’s what you need to know about Mr Burnham’s plan to cut energy bills:
What the energy bill VAT cut means for households
The measure is expected to cut £45 from Ofgem’s final energy price cap of the year, which comes into effect for October to December.
The cap is the maximum amount suppliers can charge for each unit of energy to households on a standard variable tariff. It is expressed as an annual bill for an average home.
This means that the savings passed on to households from the VAT cut to energy bills will vary. One of the key factors will be usage, with those using more energy actually set to save more on their bills due to paying proportionally more VAT.
The government has said energy suppliers will be required to pass the VAT reduction on to all domestic customers, including those on fixed-price tariffs, as happened when previous energy bill reductions were introduced.
The measure will apply across England, Scotland and Wales, while Northern Ireland, which has a separate energy market, will receive equivalent funding through the devolved administration.
How much will it cost the government?
The Treasury said the VAT cut would cost around £850m this financial year and would be funded by cancelling the government’s planned Digital ID programme, which had been expected to cost £1.8bn over the next three years.
However, the Office for Budget Responsibility (OBR) highlighted in November that the cost of the Digital ID scheme was “unfunded”, as it was based on savings from departmental budgets not yet identified.
New chancellor John Healey said the measure would offer immediate help ahead of the winter, commenting: “For too long, too many people have struggled with the cost of living”.
“Today’s energy tax cut will give families some breathing room on bills, and provide some reassurance this winter.
“This measure is funded this year from cancelling the Digital ID programme, and it will help bring down inflation while supporting households in every postcode.”
Officials estimate removing VAT from electricity bills will shave around 0.10 percentage points off CPI inflation and around 0.14 percentage points from the Retail Prices Index.
Does the change apply to businesses?
Small businesses eligible for domestic energy VAT relief that are not VAT-registered, along with charities and residential care homes qualifying for the reduced rate, will also benefit.
Unlike targeted support schemes, removing VAT benefits all households, although larger electricity users will see the biggest cash savings because they consume more power. Ministers argued that many vulnerable households, including those relying on electricity-powered medical equipment, would also gain from the measure.
The announcement builds on last year's Budget, when ministers removed nearly £150 of costs from household energy bills as part of efforts to curb inflation.
Kevin Mountford, co-founder of savings platform Raisin UK, said the move would be welcomed by households seeking greater financial certainty.
“Our 2026 Money Confidence Index found that over half of Britons feel stressed about their finances, while nearly half are either not confident or only slightly confident when planning their financial future,” he said.
“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.”
The VAT cut is expected to take effect in time for the next Ofgem energy price cap from October, with ministers indicating that any further cost-of-living measures will be considered in the autumn Budget alongside updated forecasts from the OBR.
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