📋What's Changed?
On 21 July 2026, in his first major policy announcement as Prime Minister, Andy Burnham confirmed that VAT on domestic electricity will be cut from 5% to 0% from 1 October 2026. The measure runs for six months, ending 31 March 2027 — the end of the financial year.
The cut is expected to cost the Exchequer around £850 million in 2026/27, funded by the cancellation of the digital ID programme. Suppliers are expected to pass the reduction on to every customer — including those on fixed tariffs and prepayment meters.
One quick bit of arithmetic, because the two numbers you'll see quoted look contradictory: the tax rate falls by 5 percentage points, but your bill falls by about 4.8%. That's because the 5% was added on top of the pre-tax price. A £100 supply becomes £105 with VAT; take the VAT off and you save £5 on the £105 you were actually paying — which is 4.8%, not 5%. Both figures are right, they're just measured against different starting points.
Either way it's a genuine cut. The catch is what else is happening on the same day.
🔍What You'll Actually Save
The government's headline is £45 a year for a typical household, calculated against Ofgem's price cap. It's a real number, but it describes the VAT cut in isolation — as though nothing else on your bill were moving.
Something else is. Ofgem's next price cap takes effect on 1 October 2026 — the very same day — and is widely expected to rise. As Martin Lewis put it: while you've got 4.8% coming off electricity bills, you've got around 3.1% going onto gas and electricity bills. Net it off and the realistic saving over the six months is closer to £20.
The short version
A 4.8% cut applies to electricity only. An expected ~3.1% cap rise applies to electricity and gas. The cut is real, but it's landing into a rising market — so most households will see a bill that looks flat rather than visibly cheaper. A further cap rise is predicted for January 2027, which could erode what's left of the benefit.
None of that makes the policy worthless — without it, October's bills would be meaningfully higher than they will be. But if you were expecting to open your October statement and see it drop, temper that. The honest summary is that few people will feel much change in their pocket.
Which is exactly why the things you can control — your supplier, your tariff, and when you use energy — matter more than the VAT line.
🔥Why Gas Isn't Included
The cut is electricity only. Gas keeps its 5% VAT rate throughout.
For a dual-fuel household that halves the impact at a stroke — and it stings a little more given that gas was the driver of the 13% cap rise in July 2026, when gas costs jumped around 24% against roughly 5% on electricity.
There is a logic to it, though. Cutting tax on electricity but not gas deliberately tilts the economics towards electrified heating and transport — heat pumps, EVs, and electric hot water all get slightly cheaper to run relative to gas. If you've been weighing up a heat pump or an EV tariff, the gap just widened in your favour.
👥Who Gets the VAT Cut?
Essentially everyone with a domestic electricity supply. VAT sits on top of your tariff rates rather than inside them, so it comes off whatever deal you happen to be on:
- Standard variable tariffs — yes, applied automatically from 1 October
- Fixed tariffs — yes, even mid-contract; your locked rates are pre-VAT
- Prepayment meters — yes, your top-ups stretch slightly further
- Smart and time-of-use tariffs — yes, including Agile, Tracker, Go and Cosy
- Business supplies — no, this is a domestic measure
You don't need to do anything. There's no application and no form. If anyone phones, texts, or emails asking for your bank details to “process your VAT refund”, it's a scam — hang up and report it.
🧮What It Does to Your Unit Rates
Ofgem quotes price cap rates including 5% VAT. Strip that out and today's capped electricity rates look like this — note that the standing charge gets the reduction too, since VAT applies to it as well:
These are illustrative: they apply the VAT change to today's July–September cap rates. The actual October rates will be set by Ofgem's next cap announcement, due by 26 August 2026, and will be published with 0% VAT already applied.
That's worth flagging, because it will make comparisons confusing. October's headline electricity rate may look lower than July's even if the underlying cost has gone up — the VAT change alone accounts for about 1.24p/kWh. When you compare tariffs this autumn, make sure you're comparing like with like.
⚡How to Turn It Into a Real Saving
A ~£20 saving handed to everyone equally isn't something you can influence. What you can influence is the other few hundred pounds — and because the VAT cut applies to electricity only, the households that gain most are the ones using more of their energy as electricity, at the right times:
The cap-beater for EV drivers — overnight charging at around 7p/kWh against a capped 26.11p. With VAT off electricity and gas untouched, running a car on electrons rather than petrol looks better still.
Your rate moves with the market each day, so you feel falls immediately instead of waiting for the next quarterly cap — useful in a period where the cap is expected to move twice in six months. Built-in daily caps protect against spikes.
Prices change every 30 minutes and drop well below cap level overnight and when renewables are running hard. Shift laundry, dishwasher and charging into the cheap slots and your effective electricity rate — now VAT-free — falls a long way.
Built for heat pump running patterns. With VAT coming off electricity but staying on gas, the running-cost gap between a heat pump and a gas boiler narrows further in the heat pump's favour.
And the simplest lever of all: the £50 referral credit for switching to Octopus is worth more than twice the entire six-month VAT saving, and it lands in your account within weeks rather than trickling out over half a year.
✅Verdict — Welcome, But Don't Bank On It
Verdict: A real cut, largely swallowed by a rising cap.
Zero-rating VAT on electricity from 1 October 2026 to 31 March 2027 takes about 4.8% off the electricity side of your bill, automatically, for everyone — fixed, variable and prepayment alike. But it excludes gas, it's temporary, and it lands the same day as an expected price cap rise that applies to both fuels. Headline £45; realistically nearer £20. Treat it as a small cushion against a rising market rather than a bill cut, and put your effort into the levers that move hundreds rather than tens.
Octopus Energy supplies 7.3 million UK households, has been Which? Recommended for 9 consecutive years, and holds a 4.8/5 Trustpilot rating from 779,000+ reviews. Compare every Octopus tariff — or read our October 2026 price cap guide for the other half of this story.