The tax reduction will cut the VAT rate on domestic electricity from 5% to 0% and is intended to provide short-term support as households continue to face pressure from energy costs. According to the Prime Minister’s Office, the policy will apply for the current financial year and is expected to cost around £850 million in 2026-27.
Burnham announced the move on his second day as prime minister, saying the government was taking “immediate action” to reduce energy bills and give families “breathing space” with the cost of living.
Government Says Electricity Tax Cut Will Support Households This Winter
The VAT reduction will be reflected in the next Ofgem price cap period, which begins in October. Energy suppliers are expected to pass the reduction on to customers, including those on fixed tariffs, following the approach used for previous reductions in energy charges.
According to the government announcement, the measure will also benefit some small businesses that qualify for domestic energy VAT relief, as well as charities and residential care homes eligible for the reduced rate.
The government said the policy would be funded through the cancellation of the Digital ID programme, which had been expected to cost £1.8 billion over three years. Officials said savings from that programme would be redirected towards the electricity bill reduction.
Chancellor John Healey said the measure would provide reassurance for families during the winter period. He added that the reduction would also help lower inflation, with government estimates suggesting it would reduce the consumer prices index measure by around 0.10 percentage points.
The policy follows previous government action on energy bills, including a £150 reduction announced in an earlier Budget. The new administration said the VAT cut would provide support across households rather than targeting only specific groups.
The move will not directly apply to Northern Ireland because electricity VAT arrangements are linked to EU rules following Brexit. According to the government, the Northern Ireland Executive will receive comparable funding to provide equivalent support for households.
Questions Raised Over Funding and Wider Energy Pressures
The announcement has received support from campaign groups, while also prompting questions about how the measure will be financed. Darren Jones, a former senior minister under the previous government, argued that the Digital ID programme was not fully funded and said the government would need to explain its financial plans at the Budget.
Shadow Chancellor Mel Stride also criticised the funding approach, saying the savings linked to the cancelled programme did not represent money that had already been allocated. The government has said further long-term cost-of-living measures will be considered at the Budget later this year, alongside updated financial forecasts.
Energy costs remain a political issue in the UK after prices rose sharply following Russia’s invasion of Ukraine and later pressures linked to international energy markets. According to the End Fuel Poverty Coalition, removing VAT from electricity bills is a positive move but does not resolve wider problems faced by households struggling with energy debt and high bills.
Simon Francis, the coalition’s coordinator, said further measures would be needed, including additional targeted support and changes to the way energy prices are set. The VAT reduction marks the first major cost-of-living intervention announced by Burnham since becoming prime minister. The government has said it plans to introduce further policies aimed at reducing pressure on household finances during its first Budget.
