Labour Party Prime Minister Andy Burnham’s recent announcement of a £45 VAT reduction on electricity bills is set to be effectively nullified by a significant rise in the Energy Price Cap later this year. The VAT cut, intended to ease household energy costs, will be entirely absorbed by an expected increase in the Price Cap for the period from 1 October to 31 December 2026.
Updated forecasts reveal that the Price Cap could climb by 5.1% starting in October, translating to an average annual increase of £93 for a typical energy bill. This surge would completely offset any savings from the VAT cut, meaning most households may see no net financial relief and could even face slightly higher bills compared to before the VAT reduction.
Martin Lewis, founder of MoneySavingExpert.com, highlighted these projections on social media platform X, noting that while fixed tariff customers will still experience a modest 4.8% reduction, the majority will lose out on the VAT savings. Lewis also confirmed confirmation from senior government officials that energy providers are required to pass the VAT cut on to consumers across all tariffs, including fixed ones. Major suppliers like British Gas, E.on Next, and Octopus have pledged to comply.
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The VAT cut funding is partially sourced from canceling the previous administration’s digital ID program, led by Sir Keir Starmer, which was projected to cost around £600 million annually over three years.
Prime Minister Burnham emphasized his commitment to providing financial relief, stating, “I said I wanted to give people breathing space, and that’s what I’m announcing on my second day as Prime Minister. We’re taking immediate action to cut taxes on energy bills, put more money in people’s pockets and bring back hope.”