Electricity VAT to be scrapped for six months from 1 October – watch Martin Lewis explain whether it will actually save you money

New Prime Minister Andy Burnham has announced that VAT on domestic electricity bills will be temporarily removed from 1 October 2026 to 31 March 2027, a move expected to save a typical household about £45 a year. The tax rate will fall from 5% to 0% and applies only to electricity, not gas, meaning dual-fuel customers will see the reduction on the electricity portion of their bill.

All energy suppliers are expected to pass the VAT reduction on to customers, including those on fixed tariffs, similar to the £150 energy bill reduction introduced on 1 April 2026. The cut will apply in England, Scotland and Wales, while the Northern Ireland Executive will receive equivalent funding to support households in a similar way, though some sources note VAT may still apply there due to EU tax regulations.

The policy is estimated to cost the government £850 million in the 2026–27 financial year and will be funded partly by scrapping the previous Prime Minister Sir Keir Starmer’s digital ID project, which was projected to cost around £600 million a year. Martin Lewis of MoneySavingExpert said the administration has announced the six-month VAT removal on domestic electricity bills starting 1 October.

However, energy suppliers predict the average saving could be wiped out by a projected rise in the electricity price cap, with EDF forecasting bills rising from £1,663 to £1,865 by January and Eon predicting a rise to £1,838. The Institute for Fiscal Studies said the real saving may be around £25 a year because the tax break lasts only six months, not a full year.

No application is needed; electricity suppliers are expected to apply the reduced VAT rate automatically.

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