Newly appointed Prime Minister Andy Burnham has announced that the government will remove VAT from electricity bills starting in October, marking his first major policy intervention to address the cost of living. The move is expected to reduce the average annual price-capped electricity bill by approximately £45.
This policy, which carries an estimated cost of £850m for the 2026-27 period, was described by the Prime Minister as a necessary step to offer voters “breathing space” regarding living costs.
On Tuesday, the Prime Minister stated he was implementing the immediate tax cut to help ease pressures for households in Britain, adding that the action is intended to “put more money in people’s pockets and bring back hope.”
The policy will be funded by the cancellation of the government’s digital ID scheme, a project that officials noted was expected to save £1.8bn over three years. Newly appointed chancellor John Healey, who was selected by Burnham following intense lobbying from allies of Ed Miliband and Shabana Mahmood, stated: “Today’s energy tax cut will give families some breathing room on bills, and provide some reassurance this winter.”
The announcement has faced immediate scrutiny from within the political sphere. Darren Jones, who was sacked as chief secretary to the prime minister in Burnham’s recent reshuffle, raised doubts over the funding. In a post on X, Jones noted that while the VAT cut is good news for families, the digital ID project was unfunded, leading him to question how the government would pay for the new policy.
Jones stated: “The government will have to set out how it will pay for its new policies at the budget.”
In response to these claims, newly appointed business secretary Jonathan Reynolds defended the move during an appearance on BBC Radio 4’s Today programme. Reynolds described the cut as a “statement of priorities” and a “straightforward switch spend,” asserting that it is a legitimate decision to remove pressure from households.
Chancellor John Healey is expected to set out detailed costings of the plan, alongside more long-term action to bring down living costs, at the budget later this year.
The government also noted that the policy may encourage consumers to transition from gas boilers to electric heat pumps by narrowing the price gap between the two energy sources.
The VAT cut will not apply in Northern Ireland, where the region remains bound by commitments to adhere to EU tax laws. However, the government has committed to providing the Northern Ireland executive with an equivalent amount of funding to support its own cost of living package.
This policy announcement follows Burnham’s appointment as Prime Minister on Monday, where he pledged to “bring back hope” to Westminster politics by easing the cost of living, de-privatising utilities, and ending rough sleeping.
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