The measure was unveiled on the Prime Minister’s second day in Downing Street and will take effect from Wednesday 1st October. The government says it is intended to give households “breathing space” as families continue to face pressure from the cost of living.
Ministers say the policy will be funded during the current financial year by scrapping the planned £1.8 billion Digital ID programme.
The removal of VAT will apply in time for the next Ofgem energy price cap. According to the government, households on the price cap are expected to save around £45 a year on their electricity bills. The announcement follows a £150 reduction in energy bills introduced in the previous Budget.
Prime Minister Andy Burnham said:
“Westminster has not been working for people for too long, with families struggling with the cost of living.
“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.”
Swindon North MP Will Stone welcomed the announcement and said it reflected the priorities of the new administration. He said:
“This decision by the Prime Minister, Andy Burnham marks the direction of his government, he is building on the economic growth and stability of the previous administration and acting quickly to address the needs of people as they are today.
“That’s a promise to provide economic breathing space on bills and a programme to fix the systemic issues that have held people back.”
The government says all energy suppliers are expected to pass on the VAT reduction to customers, including those on fixed tariffs, as happened with the previous £150 energy bill reduction.
Eligible small businesses, charities and residential care homes that qualify for domestic or reduced-rate energy VAT relief will also benefit from the change.
Chancellor John Healey said:
“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.”
The government said the decision has been made ahead of the autumn Budget, with longer-term funding arrangements to be considered alongside the next forecast from the Office for Budget Responsibility.
Ministers argue the policy will have the greatest impact on lower-income households, which typically spend a larger share of their income on energy. They say it also responds to continued pressure on household bills following Russia’s invasion of Ukraine and more recent instability linked to the conflict involving Iran.
