The Chancellor is considering cutting VAT on household energy bills from 5% to 0% in next month’s Budget. Treasury sources say the move could save the average billpayer around £80 a year and cost the Exchequer roughly £2.5bn.
Rachel Reeves will brief Cabinet colleagues that reducing bills is central to the government’s response to rising inflation. The CPI held at 3.8% yesterday, for the third month in a row, way above the 2% target.
A Treasury spokesperson said bringing down inflation remains the priority and confirmed Reeves will convene key ministers today. “Everything is on the table — including measures to bring down energy bills,” the spokesperson said.
Labour’s manifesto pledged to cut bills by £300 a year – but recent Ofgem decisions nudged costs higher through policy charges.
Ministers are under pressure as UK domestic energy rates remain among the highest in Europe.
The proposed VAT cut would deliver near-term relief while other levers are assessed.
Officials are also examining options to shift policy costs off electricity bills to encourage electrification, though fairness concerns remain.
Any VAT change would likely be time-limited or reviewed against inflation and wholesale trends.
The Treasury is modelling distributional impacts to ensure support reaches lower-income households.
Reeves’ push reflects concern that another inflation uptick would undermine real incomes this winter.
After peaking above 11% in October 2022, CPI fell back to the 2% target in May last year, before drifting higher on energy and food.
Industry groups broadly welcome targeted bill reductions but warn that ad-hoc relief should complement structural reforms.
Suppliers continue to call for a social tariff to protect vulnerable customers and reduce mounting arrears.
Reeves is expected to finalise the Budget package after consulting regulators and consumer groups. Any VAT change would require legislation and could take effect shortly after the fiscal event.
Chancellor weighs VAT cut on energy bills as inflation keeps biting appeared first on Energy Live News.