The change comes as the government prepares for its first Budget under Chancellor John Healey, with borrowing pressures and possible tax changes dominating political debate ahead of the 28 October announcement.
The VAT reduction was announced in July, shortly after Andy Burnham became Prime Minister. According to the Manchester Evening News, the measure is expected to save households an average of £45 a year, although the actual saving will depend on electricity prices set by suppliers and individual consumption.
Energy VAT Cut Introduced as Ofgem Raises Price Cap
Under the current system, energy suppliers apply 5% VAT to electricity usage and the daily standing charge included on household bills. From October 2026, this requirement will be removed, meaning households will no longer pay VAT on those electricity costs.
The policy was introduced as the government attempts to respond to higher energy costs. According to the Manchester Evening News, regulator Ofgem raised its energy price cap by 4%, taking the average annual bill for a household using both electricity and gas to £1,723 if sustained for a year.
Ofgem attributed the increase to higher wholesale gas prices linked to instability in international markets. The regulator said the rise represented an increase of £60 a year for the average household.
Announcing the VAT change, Andy Burnham said the government wanted to provide households with “breathing space” by reducing energy bills and putting more money back into people’s pockets.
The measure has also received criticism from some economists. According to the Manchester Evening News, Martin Lewis, founder of MoneySavingExpert, described the VAT reduction as a welcome step but said that many people would not feel a significant effect in practice.
Helen Miller, director of the Institute for Fiscal Studies, questioned how the government would fund the policy after its first year, arguing that reversing the change could create difficulties in future budgets.
Tax Options Considered Ahead of John Healey’s First Budget
The energy VAT cut is part of a wider discussion about government finances before the October Budget. According to The Independent, Andy Burnham’s government has committed to not increasing the headline rates of income tax, VAT or national insurance contributions, following Labour’s 2024 manifesto pledge.
Several other tax measures have been discussed ahead of the Budget, although the Treasury has not confirmed which policies will be introduced.
One proposal reportedly being considered is changing Capital Gains Tax rates. According to The Independent, the government could consider bringing Capital Gains Tax rates closer to income tax rates, although no decision has been announced.
Another possible measure concerns property taxation. The government’s existing high-value council tax surcharge, announced in the previous Budget, is due to apply to properties worth more than £2m from April 2028. Reports suggest ministers are considering lowering the threshold to £1.5m.
The i Paper reported that a BMG Research survey found 49% of voters supported extending the so-called mansion tax to lower-value properties, while 21% opposed the idea. The survey questioned 1,515 adults in Great Britain between 23 and 24 September.
Other possible changes include reforms to inheritance tax rules and property taxation systems. According to The Independent, options discussed include tightening existing inheritance tax rules and considering alternatives to council tax and stamp duty.
The Treasury has not confirmed which tax measures will appear in the Budget. The government’s immediate focus remains balancing spending commitments with pressures on public finances.
