Electricity VAT Cut Calculator: what you actually save
From 1 October 2026 VAT on household electricity falls from 5% to zero — the first act of Andy Burnham's government. The headline saving is £45. But that is an annual rate for a cut that runs six months, so what most households actually keep is closer to £23. Put your own numbers in.
Your electricity spend
Why £45 isn't £45
The government's figure is honest but easily misread. VAT at 5% on a typical household's electricity comes to about £45 over a full year. The zero rate runs from 1 October 2026 to the end of the financial year on 31 March 2027 — six months. So the cash that stays in a typical pocket is roughly half the headline: about £23.
The arithmetic is simple enough to check yourself. Your electricity bill already includes 5% VAT, so the tax is one twenty-first of what you pay (5 ÷ 105). Take your annual electricity spend, divide by 21, and halve it for the six-month window.
The October price cap is the catch
Ofgem confirms the October–December price cap by 26 August 2026, and forecasters currently expect a further rise of roughly 2% — in the region of £40 a year on a typical dual-fuel bill. That is close to the annualised value of the VAT cut. The likely outcome for many households is not a visibly smaller bill but a bill that holds roughly level when it would otherwise have gone up.
That is a real benefit — it just doesn't feel like one, which is the recurring problem with tax cuts delivered through a volatile bill. Our energy bill calculator covers the wider picture, including the £150 levy package that came off bills in July.
What it costs, and what was cancelled to pay for it
The zero rate costs about £850 million in 2026-27. It is funded by cancelling the Digital ID programme, which carried a £1.8 billion budget — the first concrete trade-off of the new government, and one that settles a long-running argument about mandatory digital identity in the process.
The Treasury also expects the measure to shave about 0.10 percentage points off CPI inflation and 0.14 off RPI while it is in force, which quietly matters: RPI still drives rail fares, student loan interest and some index-linked payments.
Who else benefits
The zero rate follows the existing definition of domestic energy supply, so it also reaches small businesses that are not VAT-registered but qualify for the domestic rate, along with charities and residential care homes on the reduced rate. Landlords who pay their tenants' electricity directly benefit too; tenants on a sub-meter arrangement depend on the landlord passing it on.
What happens in April 2027
Nothing has been legislated beyond 31 March 2027. Unless the Chancellor extends it at the Autumn Budget, VAT returns to 5% on 1 April 2027 and bills rise by the same 1/21st they just fell. Temporary energy measures have a strong record of being extended — but an extension has to be paid for, and John Healey is already facing a substantial gap between spending commitments and forecast revenue.
Frequently asked questions
When does the electricity VAT cut start?
1 October 2026, when VAT on domestic electricity falls from 5% to 0%. It runs until 31 March 2027 — six months — unless extended.
How much will the VAT cut save me?
The headline is about £45 for a typical household, but that is the annualised rate. Over the six months the cut actually runs, a typical household keeps around £23. The saving is 1/21st of what you pay for electricity during the window.
Does the VAT cut apply to gas as well?
No — electricity only. Gas stays at 5%. About 57% of a typical dual-fuel bill is electricity, which is why the saving looks small against a combined direct debit.
Does it apply in Northern Ireland?
Not directly. EU VAT rules still applying in Northern Ireland under the Windsor Framework prevent the zero rate there, so the NI Executive receives comparable funding to deliver equivalent help. The form and timing are for the Executive to decide.
Will the October price cap wipe it out?
Most of it, on current forecasts. Ofgem confirms the October cap by 26 August 2026 and analysts expect a rise of around 2%, roughly £40 a year on a typical bill — close to the annualised value of the VAT cut.
How is it being paid for?
By cancelling the Digital ID programme and its £1.8 billion budget. The VAT cut costs about £850 million in 2026-27.