The Prime Minister announced the removal of VAT from household electricity bills less than twenty-four hours after entering Number 10. Framed as part of efforts to address the cost of living, this decision highlights a shift in emphasis in the Government’s approach to energy policy, with a focus on reducing cost.
Winter Fuel Allowance to VAT: when policy cuts through
In July 2024, the then-Chancellor Rachel Reeves MP announced that the Winter Fuel Allowance would be restricted to those on benefits and pension credit. Keir Starmer MP, Prime Minister at the time, defended the decision and argued that, to address economic challenges, his Government would have to take unpopular decisions.
Despite undertaking a U-turn less than a year later, the decision had significant cut-through. Polling by YouGov as Starmer left office showed that it remained his most unpopular named policy.
By contrast, the Prime Minister’s choice to cut VAT from electricity bills has also cut through to the public. Polling by Opinium found that 72% of voters have heard of the policy, third only to the £2 bus fare cap in England, and the establishment of Number 10 North.
VAT are the details?
The VAT cut is estimated to cost the Government £850m, to be funded through the cancellation of the Digital ID programme. However, the Digital ID programme, as former Chief Secretary to the Treasury tweeted/x-ed it, was ‘unfunded’. It was expected to cost £1.8bn over three years through cuts and ‘reprioritisation’ from existing budgets. The Government is expected to provide the specific details as to how the VAT cut will be funded at the Budget on 28 October.
The cut, as it stands, is only due to last from 1 October for six months. However, given the Government’s priority and focus on addressing the cost of living,
The impact on bills
The cut is expected to take around The energy price cap increased by 13% in July, due to the ongoing conflict in the Middle East leading to increased wholesale gas prices. With ceasefires failing to hold, the conflict’s prolonged impact on energy costs will be a key part of the Prime Minister’s first months and potentially years in office.
Further potential increases in energy costs due to geopolitical factors may also mute the political benefit of this £45 bill reduction.
The VAT announcement poses more questions for the Government to answer
The Prime Minister has repeatedly noted the need to help businesses with energy costs. While some small businesses can benefit from this cut, the majority will not. In addition, it also benefits electric vehicle drivers with access to off-street parking who can charge at home, in comparison to those reliant on public charge points that will still have a 20% VAT rate.
The Government’s focus on energy bills creates an opportunity for businesses investing in the clean energy transition
In an interview with The Times, Energy Secretary Miatta Fahnbulleh MP signalled a softening of the Government’s approach to Clean Power 2030 in favour of reducing energy costs and maintaining democratic support for renewables. The VAT cut reflects this shift in emphasis. There are levers the Government can pull to reduce bills, from moving policy costs on bills to general taxation, encouraging energy efficiency measures and enabling the deployment of low-carbon technologies such as plug-in solar. However, with tightening budgets giving minimal room for manoeuvre, there is an opportunity for businesses that can reduce household energy costs to partner with and support the Government’s objectives to deliver real impact on bills.
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