The new prime minister has announced a significant cut in VAT on household electricity bills, effective from October 1st, in a move aimed at easing cost of living pressures.
The 5% levy will be removed from domestic electricity supplies, providing a saving of around £45 a year on a typical household bill. The cut is expected to cost the Treasury £850 million this year, but will be funded by cancelling a digital ID scheme that had been due to cost £1.8 billion over the next three years.
The prime minister said the move was designed to "bring back hope" and provide households with "breathing space" as they struggle with rising costs. He added that the government was taking immediate action to cut taxes on energy bills and put more money in people's pockets.
The cut will apply to domestic electricity supplies only, and will benefit small businesses that qualify for the domestic energy VAT relief, charities, and residential care homes. However, it will not provide relief to VAT-registered firms or commercial suppliers, who will continue to pay the standard rate of VAT on their energy bills.
Estimates suggest that the cut will shave around 0.10 percentage points off CPI inflation, providing modest but useful ammunition for firms wrestling with wage demands and waiting on cheaper borrowing.
One notable exception to the policy is Northern Ireland, where EU VAT rules still apply. In this case, the Executive will receive comparable funding to support households directly.
Critics have argued that the move does not go far enough, with the Liberal Democrats calling for a Budget to be brought forward to deliver more comprehensive support for households. The party's leader said that his party's alternative plan would deliver double the household savings, but conceded that the current move was "something".
The government has promised to set out further action, including funding beyond this financial year, alongside a full OBR forecast in the Budget. It remains to be seen whether the new prime minister's breathing space extends beyond the household front door.
