UK to Cut VAT on Domestic Electricity to 0% from October 2026

The British government has announced a temporary cut to VAT on domestic electricity supplies, reducing the rate from 5% to 0% from 1 October 2026. The VAT cut applies only to qualifying electricity supplies — gas bills are unaffected and remain subject to the existing reduced rate. At this stage, the change has been announced as government policy but has not yet been enacted through legislation.

What Is Changing and Who Will Benefit?

Prime Minister Andy Burnham has announced that VAT on qualifying domestic electricity supplies will drop from the current reduced rate of 5% to 0% from 1 October 2026. This is not an isolated measure — the UK has recently used other temporary VAT rate reductions for defined periods, such as the 5% rate applied to children's meals, cinema and theatre tickets, and family attraction admissions between 25 June and 1 September 2026.

The 0% rate applies to the same supplies that already qualify for the reduced VAT rate on domestic energy, meaning household (domestic) electricity supplies, small businesses that qualify for the domestic energy VAT relief and are not VAT-registered, charities in respect of their non-business electricity use, and residential care homes eligible for the reduced rate will all benefit. Make sure to check the current VAT rates in the UK.

The measure is timed to feed into the next Ofgem price cap update, and is expected to reduce the average household's annual electricity cost by around £45, on top of the £150 already removed from bills at the last Budget. The government has stated that it expects all electricity suppliers to pass the full VAT saving on to customers, including those on fixed-rate tariffs. The government estimates the measure will reduce CPI inflation by around 0.10 percentage points and RPI by around 0.14 percentage points.

How Will The VAT Cut Be Funded?

The measure is estimated to cost around £850 million in 2026-27, based on estimated electricity prices. It is being funded this year through the cancellation of the £1.8 billion Digital ID programme, with savings that were due to come from existing budgets redirected towards this measure instead. Any further action, including funding for longer-term measures, will be considered at the Budget, alongside an OBR forecast, and in a way that is consistent with the government's fiscal rules.

Will Northern Ireland Be Included?

Northern Ireland is not covered by this VAT change. Under the terms of the UK's exit from the EU, EU VAT rates continue to apply in Northern Ireland on goods, including electricity, so implementing this measure there would require the EU's agreement.

To ensure Northern Ireland households receive equivalent support, the Northern Ireland Executive will instead receive comparable funding from the UK government to help with the cost of living.

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