Millions of households will see a tax cut on their energy bills from this week, as the government removes VAT from domestic electricity charges.
However, the change will come into force on the same day as an increase to the energy price cap.
The measures will take effect from 1 October 2026.
Electricity VAT cut begins
The government is removing the standard 5 per cent rate of VAT from household electricity bills between 1 October 2026 and 31 March 2027.
The change applies to households on default tariffs covered by Ofgem’s price cap, as well as some small businesses. Ofgem says the typical household will save around £45 a year as a result of the electricity VAT cut.
The saving may be greater for households that use a large amount of electricity or rely solely on electric heating, while homes that use more gas will benefit less.
Gas will continue to be charged at the reduced rate of 5 per cent VAT.
The government expects energy suppliers to reflect the saving in their bills automatically. Customers do not need to apply for the reduction.
Energy bills will still rise
Despite the tax cut, many households will see their overall energy costs increase from Thursday because Ofgem’s latest price cap also comes into force.
The cap will rise by 4 per cent between October and December, taking the typical annual bill for a dual-fuel household paying by direct debit from £1,663 to £1,723. That represents an increase of around £60 a year, or £5 a month, if the level were sustained for 12 months.
The price cap does not limit the total amount a household can pay. Instead, it limits the unit rates and standing charges suppliers can apply to customers on default tariffs. The amount paid will still depend on energy usage, location, payment method and meter type.
From 1 October, the average electricity unit rate for a direct-debit customer in England, Scotland and Wales will be 26.32p per kilowatt hour, with a daily standing charge of 54.83p. These figures exclude VAT because the electricity tax cut is now in effect.
The average gas unit rate will be 7.97p per kilowatt hour, with a daily standing charge of 29.68p. Gas will continue to include 5 per cent VAT.
Customers on fixed tariffs will not be affected by the new price-cap rates, according to Ofgem.
Who will gain and lose?
The changes will have different effects depending on household circumstances.
- Households using electricity on a default tariff should benefit from the removal of VAT.
- Electricity-only homes and heavy electricity users are likely to see a larger saving.
- Gas-heavy households may find that the VAT reduction does not fully offset the rise in the price cap.
- Customers on fixed energy tariffs will not be affected by the new capped rates.
