New UK PM Burnham cuts electricity VAT, costing £850m
The newly appointed UK prime minister’s removal of VAT on electricity bills will shave £45 off annual household costs while narrowing the price gap with gas to accelerate the shift to electric heat pumps.
Andy Burnham has moved to scrap value-added tax on electricity bills starting in October, delivering an average £45 reduction to the annual price-capped bill. The policy, announced on his second day as prime minister, will cost the exchequer £850m in the 2026-27 fiscal year. Downing Street stated the measure will be funded entirely by abandoning the previous administration's digital ID scheme.
The fiscal mechanics, however, do not precisely align. While the electricity tax cut carries a one-year price tag of £850m, scrapping the digital ID programme is projected to save £1.8bn spread over a three-year period. Chancellor John Healey is expected to reconcile these figures and provide detailed costings at the budget later this year.
For the energy sector and investors tracking the transition to green infrastructure, the tax adjustment carries specific implications for the electrification of home heating. By lowering the price of electricity relative to gas, the government aims to directly incentivise consumers to replace gas boilers with electric heat pumps. This policy lever targets a major pricing disparity that has historically slowed the adoption of residential heat pumps.
“I said I wanted to give people breathing space, and that’s what I’m announcing on my second day as prime minister,” Burnham said. “We’re taking immediate action to cut taxes on energy bills, put more money in people’s pockets and bring back hope.” Chancellor Healey added that the policy would “give families some breathing room on bills, and provide some reassurance this winter.”
The choice of Healey as chancellor surprised many in Westminster after intense lobbying by allies of Ed Miliband and Shabana Mahmood. His appointment, combined with Burnham’s explicit pledge to de-privatise utilities, suggests a market environment shaped by increased state intervention.
Further policy moves are anticipated as Burnham sets out a broader cost-of-living agenda. Allies of the prime minister have already indicated he is considering capping bus fares and implementing a temporary freeze on private sector rents.
The tax cut will not apply uniformly across the UK. Consumers in Northern Ireland must continue paying VAT on electricity to comply with commitments to EU tax laws. The government said it will instead transfer an equivalent amount of funding to the Northern Ireland executive to finance its own regional cost-of-living package.
