Newly appointed UK Prime Minister Andy Burnham has announced the removal of VAT from electricity bills, reducing annual costs by an average of £45 from October. The move, confirmed on Tuesday, is the first major policy intervention to ease the cost of living crisis since Burnham took office on Monday.
Immediate tax cut for households
Burnham stated: "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." The tax cut will be funded by cancelling the digital ID scheme, which officials said would save £1.8 billion over three years.
However, within an hour of the announcement, Darren Jones—sacked as chief secretary to the prime minister in Burnham's reshuffle—raised doubts about the funding. In a post on X, Jones said: "Good news that VAT will be cut on electricity bills. It's a simple way for families to save a few quid, and to mechanically help to keep inflation that little bit lower. But the DigitalID program was unfunded. The government will have to set out how it will pay for its new policies at the budget."
Chancellor defends funding
Chancellor John Healey said: "Today's energy tax cut will give families some breathing room on bills, and provide some reassurance this winter." The VAT cut will cost £850 million in 2026-27, according to Downing Street. Burnham's newly appointed business secretary, Jonathan Reynolds, defended the move on BBC Radio 4's Today programme, calling it "a statement of priorities." Responding to Jones's claim, Reynolds said: "They are part of the government's pressure, it is a legitimate decision to remove that pressure and instead use the allocation of resources … It's a straightforward switch spend, it's the right decision to make, and one that will be made by the British people."
Broader cost of living plans
Burnham became prime minister on Monday with a pledge to "bring back hope" by easing the cost of living, de-privatising utilities, and ending rough sleeping. He surprised many by choosing Healey as chancellor after intense lobbying from allies of Ed Miliband and Shabana Mahmood. On Tuesday, Burnham is expected to outline further details on cost of living measures, including the electricity bill tax cut. Allies have also discussed reducing the cap on bus fares and temporarily freezing private sector rents.
Environmental and regional impacts
The VAT cut will also encourage consumers to replace gas boilers with electric heat pumps by narrowing the price gap between gas and electricity. In Northern Ireland, consumers will continue to pay VAT due to EU tax law commitments, but the government said it would provide the Northern Ireland executive with equivalent funding for its own cost of living package. Healey will set out detailed costings and long-term actions at the budget later this year.
