The real effect of Andy Burnham’s VAT cut on your electricity bills
Key Points
- While Burnham's scrapping of VAT on electricity bills will be welcome, it won't feel like much of a benefit for most people.
- Andy Burnham has begun his tenure as Prime Minister by scrapping VAT from electricity bills for the next six months, which is projected to save £45 off the average household bill from October.
- However, increasing price caps in October and January will likely erase most of this saving, as noted by Money Saving Expert founder Martin Lewis.
- Despite not providing much real relief to already struggling households, Lewis praised the move as a totemic change that signalled positive direction in government policy.
Andy Burnham has begun his term as Prime Minister by announcing that VAT will be scrapped from electricity bills for six months from October.
The cut applies to the average annual electricity bill of around £1,862 and takes effect on 1 October.
It will be funded in part by scrapping the digital ID scheme, which was projected to cost around £1.8 billion over three years. That scheme in turn planned to draw its funding from savings within existing departmental budgets.
Cutting VAT on electricity bills is expected to take around £45 off the yearly Ofgem price cap in October. This is on top of the £150 removed from bills at the last Budget.
Upon taking office, Burnham described the move as a measure he could take immediately to ease the cost of living challenges faced by households across the country.
“I said I wanted to give people breathing space, and that’s what I’m announcing on my second day as Prime Minister,” Burnham said.
“We’re taking immediate action to cut taxes on energy bills, put more money in people’s pockets and bring back hope.”
What will actually happen to electricity bills?
While Burnham’s scrapping of VAT on domestic electricity bills will be welcome news to households across the country, it does not directly translate to paying much less for energy.
This is according to Money Saving Expert founder Martin Lewis, who said that in reality, this won’t feel like a big benefit to most people.
In the first case, the VAT cut applies only to the electricity portion of a household’s energy bill – they will still need to pay VAT on their gas bill.
Additionally, the saving of £45 projected by the government relates to the 1 October energy price cap, which is projected to rise by just over 3% and applies to both electricity and gas.
Lewis calculates that based on the prediction for the next Ofgem price cap, the real effect of this policy will be a saving of £20 over six months for households. However, the price cap will also likely increase again in January (Lewis’s rough predication is around 2%), which will see all of these savings erased.
“Now, we need to be straight. You are still saving compared to what you would have been in if this cut hadn’t been made,” he said.
“But no one is really going to feel very much change in their pocket from this. It isn’t a huge amount.”
Lewis called this change a positive totemic one, but noted that it would not provide much practical relief due to rising energy costs related to the conflict in the Middle East.
He said he supported the principle of making electricity cheaper relative to gas, considering government’s policy of moving towards renewable energy.
