The average household will save £45 a year after the change – which is coming in October
New prime minister Andy Burnham has said he’s scrapping VAT on domestic electricity – this is what’s changing and how it’s likely to affect your bill – as well as some other ways to save on energy.
Some articles on the site contain affiliate links, which provide a small commission to help fund our work. However, they won’t affect the price you pay or our editorial independence. Read more here.
What’s changing?
Currently there’s a 5% VAT charge added to energy bills – both gas and electricity.
But one of the first policies announced by new prime minister Andy Burnham was the plan to scrap this, unless you’re in Northern Ireland.
“We’re taking immediate action to cut taxes on energy bills, put more money in people’s pockets and bring back hope,” Burnham said.
“I said I wanted to give people breathing space, and that’s what I’m announcing on my second day as prime minister.”
This policy will come into effect from October 1.
The removal of VAT won’t be possible in Northern Ireland under the terms of the UK’s Brexit deal, however the government said it would provide cost of living support funding of equivalent value instead.
Energy companies do not have to automatically reduce bills as a result of this move, but the expectation is that they will pass along these savings.
The removal of VAT affects all domestic tariffs – whether they are fixed, variable or pre-pay.
How much will my bill go down?
The government estimated this will save the average family £45 a year in electricity bills.
Of course, if you use more electricity than average you will see bigger savings, while the reverse is also true.
The people who will benefit the most are those whose entire bill is electricity, while those with dual-fuel or heating oil set ups will save less.
The simple way to work it out is to knock 5p off your electricity bill for every pound you spend on it. So if your bill is £40 a month, you’ll save £2.
Featured switching deal
Customer rating
3.9/5
- Switch bonus£180
- Offer endsUnknown
- Perks8% regular saver
- FSCS Protected? Yes
- Switch bonus requirements Switch using the Current Account Switch Service and close your old account within 60 days of starting the switch
- Deposit requirements Deposit £1,500 in the first 60 days from opening the account
- Direct debits transferred over Set up two Direct Debits before or after the switch from a selected list of household bills
- Existing customers? Can't have held any Santander current account on 1 January 2025
- Restrictions Can't have received a switching bonus from Santander already, offer limited to once per person
- Eligible accounts Open a new or hold an existing Everyday, Edge, Edge Up or Edge Explorer current account
- Regular saver 8% (variable) regular savings account. Includes 5% (variable) bonus for 12 months
Where’s the money coming from to cut VAT on electricity?
The government estimates this change will cost it £850 million, which they are funding from cuts to other programmes.
New Chancellor of the Exchequer John Healey said: “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 digital ID programme was set to cost £1.8 billion over the next three years. The keen-eyed among you will realise that only covers two years of a permanent cut to electricity bills.
The rest of the money will come from savings that were due to be “identified from within existing budgets through reprioritisation, which will now be redirected towards this measure”.
The government added that any further action will be taken at the Budget, and that all decisions “will be funded and also consistent with the government’s fiscal rules”.
Get the best of our money saving content every week, straight to your inbox
Plus, new Quidco customers get a high paying £18 welcome offer
How else can you save on electricity?
Here are the most effective ways to save money on electricity – regardless of whether there’s VAT on it or not:
Switch to a cheaper provider
Comparing energy providers and switching is the simplest and most effective way to save money on bills. Comparison site Uswitch calculates that if you’re on a standard variable tariff you can save £200 a year on your bills by switching to a cheaper provider.
Upgrade your appliances
Older appliances tend to use more energy than newer ones – check out the energy rating on new gear before you buy, A is the best score and means the appliance is the most energy efficient.
Switching to LED lights also provides a big saving if you haven’t already done that.
Use your appliances more efficiently
This is about getting the most bang for you buck from what you have now. The dishwasher uses the same amount of power and water whether it’s full or empty – so try and only run full loads. If you’re making tea, boiling more water than you need, only for it to sit in the kettle to cool down afterwards, is a waste too.
Obviously this goes triple for things like leaving lights on in empty rooms, or the TV, radio or music player running in the background when you’re not there.
Look for energy-free options
If you can use a drying rack or washing line instead of the tumble dryer, then you don’t need to pay to run the appliance. Cold-brew coffee can be made overnight without needing to run the kettle or coffee machine at all.
Finally, if you’re heading away on holiday, turning things off at the plugs rather than leaving them on standby can mean savings too.
