Why a temporary VAT cut on electricity bills misses the point

The average UK household now spends £1,928 a year on electricity and gas, up 54% since 2021. Against that backdrop, the idea of a temporary VAT cut on electricity bills sounds like relief. But the Institute for Fiscal Studies (IFS) has poured cold water on the proposal, calling it ‘poorly targeted’ and ‘ineffective’ at addressing the root causes of high energy costs. As reported by the IFS, the cut would reduce the 5% VAT on domestic electricity to 0% for a limited period, saving a typical household roughly £30 a year. For a family in a 3-bed semi using 12,000 kWh annually, that’s about 58p a week. The catch is that this relief goes to everyone, regardless of income: a single person in a flat gets the same absolute saving as a large family in a detached house.

Who benefits, and who doesn’t

The IFS analysis shows that the richest 20% of households would gain twice as much in cash terms as the poorest 20%, because they use more electricity. That is the opposite of what energy policy should do. Ofgem figures show 4.5 million UK households are in fuel poverty, spending more than 10% of income on energy. For them, £30 is not nothing, but it is dwarfed by the £200–£400 gap between what they can afford and what they actually pay. The Warm Home Discount, by contrast, gives £150 directly to low-income households, and is far more efficient at reaching those who need it.

What it costs a typical 3-bed semi

Let’s run the numbers. A typical 3-bed semi uses about 12,000 kWh of electricity per year (including heating if on a heat pump). At the current average unit rate of 24.5p/kWh (Ofgem price cap, October 2024), that comes to £2,940. Remove the 5% VAT, £147, and you save £147, not £30? No. The IFS calculation assumes the cut applies only to the electricity portion of the bill, not the standing charge or gas. Most households also use gas. For a dual-fuel home, the electricity share is roughly 3,500 kWh at 24.5p = £857.50. VAT at 5% is £42.88. So the saving is about £43 a year. Hardly transformative. For all-electric homes (e.g., heat pumps), the saving is larger, about £147, but those homes are still a minority.

The deeper problem: this doesn’t fix the leak

What this misses is that a temporary VAT cut does nothing to reduce the underlying cost of electricity. Network charges, wholesale prices, and green levies make up the bulk of the bill. The Energy Saving Trust estimates that a typical home could save £300–£400 a year by installing loft insulation, cavity wall insulation, and draught-proofing, and that saving is permanent. An EPC improvement from D to C can add £1,800 to a home’s value, according to estate agent research. Yet the government has cut the Green Homes Grant and delayed the Boiler Upgrade Scheme‘s expansion. The IFS is right: if the Treasury wants to help households, it should fund insulation, expand the Warm Home Discount, or reduce the 20% VAT on heat pumps (currently 5% for air-source, but 20% for ground-source in some cases). A temporary VAT cut on electricity is a headline grabber, not a solution.

What UK homeowners should do instead

If you are a homeowner, do not wait for a VAT cut that may never come. Check your EPC rating on gov.uk. If it is below C, you are losing money through the roof and walls. The Boiler Upgrade Scheme offers £7,500 off a heat pump, that is a real saving, not 58p a week. For solar panels, the Smart Export Guarantee pays you for electricity you send to the grid, typically 5–15p/kWh. And the Great British Insulation Scheme offers free or subsidised insulation for low-income households. Apply now: these schemes have limited funding and close when the money runs out.