VAT on UK Household Electricity to Fall From 5% to 0% From 1 October
On 21 July the government announced that VAT on household electricity will fall from 5% to 0% from 1 October. It expects the change to take around £45 a year off the energy price cap, and it applies to electricity only, not gas.
What was announced
Prime Minister Andy Burnham announced the change on 21 July 2026. The government says it applies and is funded for the 2026 to 2027 financial year, with any further action on longer-term funding left to the Budget. It expects suppliers to pass the cut on to all customers, including those on fixed tariffs. The cost is put at about £850 million in 2026 to 2027.
It will be paid for by cancelling the Digital ID programme. In Northern Ireland, EU VAT rules apply under post-Brexit arrangements, so the cut would need EU agreement. Instead, the Executive receives comparable funding to support households.
How big is the saving?
The government's figure is around £45 off the yearly price cap from October, on top of the £150 removed at the previous Budget. Commentators were cautious. ITV News reported Martin Lewis saying most people would not feel much benefit, in part because the price cap was predicted to rise by 3.1% in October.
Ofgem sets the cap for the October to December quarter, and we have not seen that announcement yet. The net effect on your bill will depend on it, so treat the £45 as the effect of the tax change alone.
What it means for home batteries
A home battery earns its keep from the gap between the price you pay to import electricity and what you avoid buying or earn by exporting. Taking 5% VAT off a price that included it lowers that price by about 4.8%. All else equal, each kWh a battery shifts then avoids slightly less cost.
The effect is small, and the change is funded for one financial year with the longer term left to the Budget, so we would not change a sizing decision because of it. Usage, tariff and the spread between cheap and expensive periods matter more. If you use a payback calculator, including our home battery calculator, check whether its electricity prices include VAT.
What we are watching
Three things: Ofgem's price cap announcement for October to December, how suppliers apply the change to fixed tariffs, and the Budget's decision on the longer term. We will update our coverage if the details change. For how tariffs and batteries interact, see how dynamic tariffs are changing the role of home batteries.
Sources
- GOV.UK: New PM cuts tax on household electricity bills to give breathing space on cost of living
- ITV News: Andy Burnham announces tax cut on energy bills from October
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