Burnham Cuts Tax on Energy Bills in First Cost-of-Living Help

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(Bloomberg) — The UK will scrap a 5% tax on energy bills starting from October, new Prime Minister Andy Burnham announced, the first of several policies expected to offer households more “breathing space” with the cost of living.

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On his second day as prime minister, Burnham removed value added tax from household electricity bills from Oct. 1, a move the government said would save families on average £45 a year. Burnham’s office said in a press release that the policy would cost £850 million in 2026-27 and be funded by dropping his predecessor Keir Starmer’s proposed digital ID program. Officials estimated it would reduce the headline inflation rate by 0.1 percentage point.

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“Westminster has not been working for people for too long, with families struggling with the cost of living,” Burnham said in a statement. “That needs to change. I said I wanted to give people breathing space, and that’s what I’m announcing on my second day as prime minister.”

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Britain has some of the highest energy costs in the developed world. Prices spiked after Russia’s 2022 invasion of Ukraine and have remained elevated, especially since war broke out in the Middle East in February.

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The VAT cut marks a change from the previous government’s plans for winter energy support. The former chancellor Rachel Reeves had said she was working on targeted support that would help only the most vulnerable whereas the VAT cut will help everyone.

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At the start of this month UK households saw the biggest increase in energy bills since 2023 as the war in Iran drove up wholesale gas and power costs. Prices may rise again under the price cap model, which sets the maximum rate per unit that suppliers can charge households.

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It’s updated quarterly and the next price cap will be announced at the end of August and come into effect in October, when the heating season gets underway.

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The proposal of removing VAT from energy bills has previously been criticized by the International Monetary Fund as “costly” having “only a small impact on inflation.”

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The Institute for Fiscal Studies think tank has previously said the policy “would benefit poorer households most as a proportion of their budgets (since energy bills make up a larger share of their budgets), but it would benefit richer households most in cash terms.”

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“By providing more support to those who use more energy, removing VAT would be well targeted at those who face the biggest rise in their energy bills, but not at those – the poorest – who are least able to cope with the rise in costs,” it said.

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Burnham on Monday appointed as energy secretary Miatta Fahnbulleh, a left-winger ally of the previous holder of the post, Ed Miliband.

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—With assistance from Louise Moon.

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