New Prime Minister implements zero rate on home electricity bills, saving £45 per household
The UK government has announced the removal of VAT on domestic electricity bills from 1 October 2026, cutting the rate from 5% to 0% as one of Prime Minister Andy Burnham’s first policy measures after taking office.
The measure is intended to reduce household energy costs ahead of winter and is expected to lower the annual Ofgem price cap by around £45 per household. It follows the £150 reduction in energy bills announced in the previous Budget.
See how other countries’ inflation VAT measures following the February start of the Iran conflict as price rises.
See more in our UK VAT guide.
Temporary? To be reviewed in next budget
The measure may be temporary, applying from 1 October 2026 until the end of the 2026-27 financial year (31 March 2027). The government says any decision to extend the zero rate beyond that date will be considered at the Autumn Budget and funded in line with its fiscal rules. But it does appear confident that it can make permanent with OBR blessing.
Funded by Digital ID Cancellation – but doubts
The VAT relief will apply for the current financial year and is estimated to cost £850 million in 2026-27. The government will fund the measure by cancelling the planned £1.8 billion Digital ID programme, with any decision on extending the relief beyond this year to be considered at the Autumn Budget.
However, the funding for the Digital ID’s was not yet clarified, and itself seems to only have been attached to unidentified savings.
The government also expects all electricity suppliers to pass the full VAT saving on to customers, including those on fixed-rate tariffs.
Who Benefits?
The zero rate will benefit millions of households across Great Britain. In addition, certain small businesses eligible for domestic energy VAT relief, together with charities and residential care homes qualifying for reduced-rate energy supplies, will also see lower electricity costs.
The Treasury estimates the measure will also reduce inflation by around 0.10 percentage points on CPI and 0.14 percentage points on RPI, providing a modest wider economic benefit.
Northern Ireland VAT Rules Remain Unchanged
The announcement also highlights the continuing VAT complexities created by the Windsor Framework. Under the UK’s post-Brexit arrangements, EU VAT rules continue to apply to goods in Northern Ireland, including electricity. The UK government therefore cannot unilaterally reduce the VAT rate there without EU agreement.
Instead, the Northern Ireland Executive will receive equivalent funding to provide comparable cost-of-living support, ensuring households in Northern Ireland receive similar financial assistance despite the different VAT treatment.
VAT Still a Powerful Policy Tool
The announcement demonstrates how VAT continues to be used as a rapid fiscal policy instrument to address economic pressures. At the same time, it illustrates how post-Brexit VAT rules have created different policy options across the UK, particularly for goods covered by the Windsor Framework.
