Full Breakdown
Andy Burnham Scraps Value Added Tax (VAT) on Domestic Electricity Bills, Funding Shift From Cancelled Digital ID Programme
7/25/2026, 2:15:02 AM
Core Policy Announcement
On October 1 the United Kingdom will remove the 5 % VAT on domestic electricity, reducing the rate to 0 %. The measure, announced on July 21 by Prime Minister Andy Burnham, is financed by the cancellation of the government’s £1.8 billion Digital ID programme. Downing Street called the reallocation a “straightforward switch spend” that lets the Treasury “give real help to people” without breaching fiscal rules.
Background & Context
The cut comes amid a cost-of-living crisis that saw household energy prices surge after the 2022-23 global gas shock. Earlier in the year, former Chancellor Rachel Reeves removed a levy on energy bills and shifted other charges onto general taxation. The Digital ID scheme, intended to issue a digital identity document to all employees, had been labelled a “fiasco” by a cross-party parliamentary committee.
Data & Statistics
- Expected average annual saving for a typical household: £45.
- Estimated cost to the Treasury in the 2026-27 fiscal year: £850 million.
- Funding source: cancellation of the £1.8 billion Digital ID programme.
- Projected impact on inflation: -0.1 pp on the CPI and -0.14 pp on the RPI.
- The cut applies to electricity only; gas VAT remains at 5 %.
Official Statements & Responses
The Treasury confirmed the reallocation complies with existing fiscal rules and that further energy-cost measures will be set out at the upcoming Budget, guided by an Office for Budget Responsibility forecast.
Criticism & Opposition
Reform UK leader Nigel Farage argued the cut is possible only because of Brexit but does not address underlying cost-of-living pressures, especially for households heated by oil or gas. Consumer-advocate Martin Lewis warned the £45 saving could be eroded by the next Ofgem price-cap increase.
Conflicting Reports & Gaps
Sources differ on the duration of the VAT exemption. Government releases state the cut is funded for the current financial year and will be reviewed at the Budget, implying it could extend to the end of 2026-27. In Northern Ireland, the Treasury notes EU VAT rules apply, while Communities Minister Gordon Lyons criticised the decision to provide separate funding rather than extending the UK-wide rate.
Verbatim Quotes
- “We’re taking immediate action to cut taxes on energy bills, put more money in people’s pockets and bring back hope,” — Andy Burnham, British prime minister
- “Under the terms of the UK's exit from the EU, EU VAT rates apply in NI on goods, including electricity.” — The Treasury
What’s Next
The Treasury indicated that longer-term energy-cost relief will be detailed in the forthcoming Budget. A statutory instrument will be required to amend the VAT rate, and any extension beyond the 2026-27 cycle will depend on fiscal assessments and broader energy-policy decisions.
