ENERGY BILLS: VAT axed on electricity from October — with a typical home saving around £45

Households across Swansea Bay and west Wales will stop paying VAT on their electricity from 1 October — with a typical home saving around £45 a year.

The VAT rate on household electricity will be cut from 5% to 0% from 1 October, running for six months until the end of the financial year in March.

It was the first policy announcement from new Prime Minister Andy Burnham. “I said I wanted to give people breathing space, and that’s what I’m announcing on my second day as prime minister,” he said, adding the government was taking “immediate action to cut taxes on energy bills”.

The measure is expected to take around £45 off Ofgem’s final energy price cap of the year, which comes into effect for October to December — though the actual saving depends on how much electricity a household uses, with heavier users saving more.

Suppliers will be required to pass the reduction on to all domestic customers, including those on fixed-price tariffs.

Gas is not included — the 5% VAT rate stays on gas bills.

That means the biggest winners are all-electric households — including homes off the mains gas grid, common across rural Carmarthenshire, where thousands of oil-heated homes were recently offered £9,000 grants to switch to heat pumps — and flats heated by electricity.

Ministers argued vulnerable households would also gain, including those relying on electricity-powered medical equipment — along with small businesses eligible for domestic energy VAT relief, charities and residential care homes.

Chancellor John Healey said the cut would be funded by cancelling the Digital ID programme announced by former prime minister Sir Keir Starmer, saying it would “help bring down inflation while supporting households in every postcode”.

The funding claim has drawn fire: Darren Jones, formerly chief secretary to Starmer, claimed the Digital ID programme was itself unfunded and called on the government to “set out how it will pay for its new policies” — while Conservative leader Kemi Badenoch made a similar criticism.

It is the second VAT cut aimed at household budgets this year — a temporary cut covering children’s meals, cinema tickets and family attractions came into force for the summer holidays and runs until 1 September.

There’s a catch on timing too. Consumer expert Martin Lewis said “in practice people won’t feel much benefit”, with the price cap predicted to rise around 3.1% in October — meaning for many the saving will soften an increase rather than cut what they currently pay. Bills across south Wales have stayed stubbornly high even as the region pitches itself as a future clean power giant.

Comparison site Uswitch said the cheapest fixed deals are currently undercutting standard rates by around £210 for an average household — savings that would come on top of the VAT change for those who switch before winter.

Officials estimate the move will shave around 0.10 percentage points off CPI inflation.

The announcement came a day after the new cabinet was sworn in — with Aberafan Maesteg MP Stephen Kinnock becoming Welsh Secretary.

Burnham said the cut was the first in a series of planned moves on the cost of living, which he has identified as a key aim for his first months in office.