VAT on electricity bills cut to 0%

What has been announced?

On 21 July 2026, in one of his first acts as Prime Minister, Andy Burnham announced that VAT on domestic electricity bills will be removed from 1 October 2026, falling from the current reduced rate of 5% to 0%.

This will be of interest to electricity suppliers and consumers.

The measure will extend to small businesses that qualify for the domestic energy VAT rate but aren’t VAT-registered, as well as charities and residential care homes eligible for the reduced rate on fuel and power supplies.

The change was announced in a government press release. At present, draft legislation is awaited and supplies of electricity for ‘qualifying use’ currently remain subject to the reduced rate of 5% under VAT Act 1994, Schedule 7A, Group 1.

Features to note

The change is only for electricity, not for gas.

The government press release states ‘0%’ rather than ‘exempt’. This is an important distinction for suppliers, as a zero rate allows them to recover VAT on costs, whereas exemption does not. It’s hoped the zero rate makes it into the legislation.

Evidence suggests targeted VAT cuts usually benefit suppliers rather than customers. The government stated that it ‘expects all suppliers to pass the VAT reduction on to all customers’. It remains to be seen whether the government can enforce this.

Even if the VAT saving is passed on to customers, the government estimates the average household will save £45 each year. In practice, the savings will be unevenly distributed: those who use more electricity will save more, while those who use less will save less.

Who benefits from VAT cuts?

The paradox is that those who need the saving most may receive the least benefit, as people on limited budgets are likely to restrict their electricity consumption.

There will be exceptions, such as vulnerable people who rely on electrically powered medical devices, and the government’s attempt to provide support is welcome. But will these savings actually reach customers?

Evidence casts doubt on the pass-through of targeted VAT rate reductions, as we noted in our earlier article ‘Bras: should there be a VAT charge?’ (Taxation, 20 May 2024). In 2015, the International Monetary Fund published a working paper, ‘Estimating VAT Pass Through’, which found that reduced-rate VAT changes resulted in pass-through of only around a third. For reclassifications between rates, pass-through was essentially zero.

This was seen in practice when VAT was removed from women’s sanitary products and consumers saw, at most, a 1% price cut, with almost all of the benefit retained by suppliers (Tax Policy Associates, 10 November 2022). Regulators will need to monitor suppliers closely to ensure prices don’t drift upwards.

If Mr Burnham was hoping for an electric start, we’ll have to wait and see whether the benefits flow through to customers.