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UK to cut VAT on energy bills to zero for six months
The government says the move would reduce the annual energy price cap by £45 and lower headline inflation by about 0.1 percentage points, while Downing Street estimates a £850m cost in 2026-27.
Britain will cut the VAT rate charged on energy bills in Great Britain from 5% to zero for six months starting 1 October, when Ofgem’s new energy price cap takes effect, with the policy positioned as “breathing space” for households, according to the UK government as described by Guardian Business.
The planned VAT change is designed using figures based on a typical household’s energy use, with the government saying it would effectively reduce the annual price cap by £45 and reduce headline inflation by about 0.1 percentage points. Critics have argued the policy is poorly targeted because it would benefit higher income households as well as lower income ones, and would subsidize consumption rather than encourage reductions.
The announcement also arrives as Prime Minister Andy Burnham faces scrutiny over how his wider spending pledges will be funded. The Guardian Business reports that even as official figures showed the UK borrowed less than expected in June, bond investors remain wary due to the country’s elevated borrowing and debt levels, the impact of the Iran war, and rising spending pressures.
Burnham has said he will stick to Labour’s fiscal rules and the manifesto promise not to raise taxes on working people. According to the Resolution Foundation, headroom against the fiscal rule of £23.6bn at the time of the spring statement is expected to have fallen to about £10bn today, and it warned, “There is no spare cash lying around.” The article says Downing Street expects the VAT cut to cost about £850m in 2026-27, and that it will be funded through cancellation of Keir Starmer’s digital ID programme.