What will Andy Burnham’s VAT cut on electricity bills mean for you?
New prime minister is implementing immediate tax cut to help ease cost of living pressures for British households
Household electricity bills for people in Great Britain will not attract VAT for six months, under the first of a series of cost of living measures announced by the new prime minister, Andy Burnham.
How much will I save?
Normally households pay 5% VAT on their electricity. This is applied once the daily standing charge and cost of the units you have used have been added up, so the actual sum you pay will vary from bill to bill.
From 1 October – the day the regulator Ofgem’s new price cap on energy comes in – there will be no VAT on the electricity you use if you live in Great Britain. This will cover the winter months, which typically bring the highest bills of the year.
Using figures based on a typical household’s energy use, the government says the saving will in effect reduce the annual price cap by £45. Your actual savings will depend on your usage.
In Northern Ireland VAT will remain at 5% because post-Brexit rules mean that EU rates apply. However, the Stormont government will be given money to fund cost of living measures for people living there.
I’m on a fixed-rate energy tariff – will I save?
Yes. On a fixed-rate tariff the cost of your standing charge and units are set for a certain period, but your bill still varies according to how much you use, and VAT is still applied at the end. Your provider will treat you as it does customers on a standard tariff.
Does this mean my bill will go down?
Not necessarily. If you are not on a fixed-rate tariff then the amount you pay per unit of electricity moves in line with Ofgem’s price cap, and this may rise in October. The latest prediction from the experts at Cornwall Insight is that the cap will increase by 2%, with the war in the Middle East the main reason.
If that is right, you will be paying less than without the VAT cut, but will still end up paying more overall.
The Institute for Fiscal Studies (IFS) thinktank says that since the start of the Iran war the price of gas has risen much more sharply than the cost of electricity – 24% compared with 5%. “If the goal of today’s policy is to help households that have lost out as a result of the war, it is not well targeted at achieving that aim,” it says.
Who benefits most?
This is a saving for everyone, but because VAT is charged on how much you use, as well as the standing charge, households with high energy usage will benefit most.
The cut will be good news for people who rely solely on electricity for heating, and those who have other reasons to use a lot of power. It will also be a boost for households who have adopted some green technologies: electric cars will be cheaper to charge and heat pumps cheaper to run.
Adam Scorer, the chief executive of the charity National Energy Action, says: “It will help everyone, but be less useful for the huge majority of low-income households who heat their homes with gas and cannot afford the upfront cost of shifting to solar, batteries and heat pumps. It is not a trivial distinction.”
Camilla Born, the head of the industry-backed campaign group Electrify Britain, said: “By choosing to take VAT off electricity only – rather than gas – it appears that Burnham has finally gotten the memo that the priority is to get Britain using our homegrown clean power. Until we shift to electric heating, driving and manufacturing we will remain exposed to fossil fuel prices.”
The IFS says that relative to household spending, the cut will be most meaningful to the lowest-income households. “On average, the 10% of households with the lowest disposable incomes allocate 5% of their spending to electricity bills, compared with just 2% for the 10% of households with the highest disposable incomes,” it says.
“In cash terms, however, a disproportionate share of the cost of today’s tax cut will go to higher-income households who use more electricity overall despite it making up a smaller share of their spending.”
Should the government do more?
Charities say that while the VAT cut is helpful, the government should be looking at the problems faced by people who are already behind with their bills. Energy debt is at a record high, according to the industry trade association Energy UK, which says households owe a total of £5.5bn to providers.
National Debtline says energy is the second most common debt its advisers hear about, and that on average people contacting it owe £2,575 to their providers. A debt relief scheme that would allow suppliers to write off some outstanding bills has been proposed and consulted on by Ofgem, but is not in place.
Steve Vaid, the chief executive of the Money Advice Trust, the charity that runs National Debtline, says: “Ministers should move ahead with the scheme now to provide urgent respite for people who’ve built up energy debts through no fault of their own.
“With nearly half (46%) of the people we support at National Debtline not having enough money to even cover their essential bills, it is clear households desperately need support with the cost of living, support to build financial resilience, and increased access to advice to help them find a way forward.”
Andrew Sissons, a director at the thinktank Nesta, which has advised the new government on energy policy, said that while the VAT relief would help during the colder months, November’s budget “would be the right opportunity for the new chancellor to set out a wider and more long-term set of reforms to reduce electricity costs”.
Nesta has put forward a more detailed plan, which would change the way household gas is charged and remove some policy levies from bills – at a cost of £3.2bn a year to the taxpayer – and would shave £130 off average bills.
Industry has warned that businesses will need help, too. The VAT relief will not apply to most businesses, aside from small companies and charities, so will do little to stem the economic contagion of higher energy costs, which has inflated the price of everyday goods.