Households across the UK are set to see a reduction in their electricity bills from 1 October, as Prime Minister Andy Burnham has announced the removal of Value Added Tax (VAT) from domestic electricity1. This marks the new administration's first cost of living measure since taking office.
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What is VAT and how is it applied to domestic energy?
VAT is a consumption tax applied to most goods and services in the UK. For energy, the specific rate depends on whether it is for domestic or non-domestic use. While most businesses typically pay a standard rate of 20% VAT on their electricity and gas, domestic energy bills have historically benefited from a reduced rate. This distinction is part of government policy aimed at helping manage household living costs.
The standard reduced rate for households
For almost all UK households, the standard reduced rate of VAT applied to domestic energy bills, including both gas and electricity, has been 5%. This rate is applied to the total cost of your energy consumption, encompassing both the unit rate per kilowatt-hour (kWh) and the daily standing charge. It is a consistent application across all domestic energy suppliers.
Prime Minister's announcement and effective date
Prime Minister Andy Burnham confirmed that VAT will be removed from domestic electricity bills starting on 1 October. This announcement was made as part of his commitment to provide "breathing space" for households struggling with the cost of living.
Estimated savings for average households
The removal of VAT is estimated to reduce the average energy bill under the Ofgem Price Cap by around £45. While this figure provides a general idea, actual savings will vary depending on individual household energy consumption. The Ofgem Price Cap limits the maximum amount suppliers can charge for each unit of electricity and gas, as well as the standing charge, and is reviewed quarterly.
Why the change now?
This policy change is a direct response to the ongoing cost of living crisis in the UK. The initiative's funding was secured by cancelling the Digital ID programme, with the allocated resources redirected towards measures aimed at easing financial pressure on households.
How to spot VAT on your current bill
Your energy bill should clearly itemise the VAT charge and the rate applied. Typically, you will find this information listed alongside your energy usage and standing charges, often labelled "VAT" near the total amount due. For domestic customers, this should currently show a 5% charge.
Anticipating your savings from 1 October
From 1 October, the VAT line item on your electricity bill should reflect the removal of this charge. While the estimated average saving is around £45, your personal saving will depend on your electricity usage. Households with higher consumption will see a greater monetary reduction, as the 5% VAT was applied to the total cost of their electricity.
Are there any other exemptions?
While the general VAT rate for domestic energy has been 5%, certain specific conditions could lead to exemptions or different applications. For instance, some charities may claim VAT at 5% for electricity used in charitable non-business activities. For combined commercial and domestic use, if domestic usage is 60% or more, the entire bill could be charged at 5% VAT. It is also worth noting that VAT on the installation of energy-saving materials like solar panels has been 0% in Great Britain since April 2022, a rate set to continue until 31 March 2027.
The context of the cost of living crisis
The removal of VAT from electricity bills is a welcome step, but it is important to view it within the broader context of the ongoing cost of living crisis. Many households continue to face significant challenges with high energy costs and accumulated energy debt. The End Fuel Poverty Coalition, while acknowledging the positive intent of the VAT removal, has cautioned that it "does not address the scale of what households are facing". They advocate for further measures, including enhanced targeted support and systemic changes to energy pricing.
Additional support and energy saving strategies
Several government schemes and energy supplier initiatives are in place to help households manage their energy costs and debt:
- Warm Home Discount: This scheme provides a one-off discount of £150 on electricity bills for eligible low-income households between October and March. Most eligible households receive this automatically.
- Cold weather payment: If the average temperature in your area is recorded as, or forecast to be, 0°C or below for seven consecutive days between 1 November and 31 March, you could receive £25 for each period. Eligibility is tied to certain benefits, and payments are usually automatic.
- Energy supplier grants: Many energy suppliers offer grants and support funds to help customers in debt. It is advisable to contact your supplier directly to inquire about available assistance.
- Fuel direct scheme: This government scheme allows you to repay energy debt directly from your benefit payments if you are struggling to pay for your energy and receive certain state benefits.
Understanding your energy usage is key to managing costs. Fuse Energy provides clear, transparent billing and in-app usage data to help you stay on top of your energy consumption. Our 24/7 human support team is always on hand with fast response times whenever you need help. Click here to switch to Fuse Energy today and take control of your bills.
References
- End Fuel Poverty Coalition. VAT to be scrapped from electricity bills from 1 October
