The UK government will remove the 5% VAT rate on domestic electricity bills from October 1 for the remainder of the 2026-27 financial year, with the measure funded through the cancellation of the GBP 1.8 billion Digital ID programme.
The UK government has announced today, 21 July 2026, that VAT on domestic electricity bills will be reduced from 5% to 0% from 1 October 2026, providing support to households ahead of the next Ofgem price cap as part of a package of cost-of-living measures introduced by Prime Minister Andy Burnham.
The measure will apply for the current financial year and is expected to be funded through the cancellation of the GBP 1.8 billion Digital ID programme.
The government said any longer-term decisions on funding or further support would be considered at the Budget alongside an Office for Budget Responsibility (OBR) forecast and would remain consistent with its fiscal rules.
According to the government, removing VAT from electricity bills is expected to reduce the annual Ofgem price cap by around GBP 45 from October. This follows the GBP 150 reduction in energy bills announced at the last Budget.
“Westminster has not been working for people for too long, with families struggling with the cost of living.
That needs to change. I said I wanted to give people breathing space, and that’s what I’m announcing on my second day as Prime Minister. We’re taking immediate action to cut taxes on energy bills, put more money in people’s pockets and bring back hope,” said Prime Minister Andy Burnham.
The government said the VAT reduction is expected to be passed on by all energy suppliers to customers, including those on fixed tariffs, in the same way as the previous GBP 150 reduction in energy bills.
The measure will also benefit small businesses that qualify for domestic energy VAT relief and are not registered for VAT, as well as charities and residential care homes eligible for the reduced VAT rate.
Funding and inflation impact
The government estimates that the VAT reduction will cost around GBP 850 million in 2026-27, based on current electricity price estimates. Updated cost projections will be published at the Budget.
Funding will come from cancelling the Digital ID programme, which was expected to cost GBP 1.8 billion over the next three years. Savings that had been planned through reprioritisation of existing budgets will instead be redirected to finance the VAT reduction.
The government estimates the measure will reduce Consumer Prices Index (CPI) inflation by around 0.10 percentage points and Retail Prices Index (RPI) inflation by around 0.14 percentage points.
The announcement said the policy is intended to support households facing higher energy costs following Russia’s invasion of Ukraine and rising geopolitical tensions linked to the war in Iran, while helping to contain inflation.
Northern Ireland arrangements
The government said that under the terms of the UK’s exit from the EU, EU VAT rules continue to apply to goods in Northern Ireland, including electricity, meaning implementation of the VAT reduction there would require agreement from the EU.
To ensure households in Northern Ireland receive equivalent support without delay, the Northern Ireland Executive will receive comparable funding to provide cost-of-living assistance for households in the region.
