Prime Minister Andy Burnham has unveiled his first major policy since taking office, cutting VAT on electricity bills to zero from October 1, but the move was immediately clouded by questions over how it will be paid for.
The measure removes the 5% VAT rate currently applied to household electricity bills, with the government estimating typical savings of around £45 per household per year. Chancellor John Healey said the change would give families some “breathing room on bills.”
The Treasury says the roughly £850 million cost will be met by scrapping the digital ID scheme introduced under former Prime Minister Sir Keir Starmer, which had been projected to cost around £600 million a year over three years, according to figures.
However, Darren Jones, who lost his Cabinet role as chief secretary to the prime minister in Mr Burnham’s reshuffle, questioned the arithmetic. Writing on X, Jones, who had been responsible for the digital ID programme, welcomed the VAT cut as a straightforward way to help families save money, but added that the digital ID programme was itself unfunded, meaning ministers would need to explain at the Budget how the new policy will actually be paid for.
A source close to the prime minister pushed back, telling reporters the digital ID costings had always been accounted for within general government spending.
The criticism was echoed by the opposition. Conservative leader Kemi Badenoch said the explanations offered by the new government were already “falling apart” only one day into its term, arguing that funding a policy from an already-unfunded scheme did not add up. Shadow chancellor Mel Stride made a similar point, noting that the Office for Budget Responsibility had flagged the previous November that the annual cost of the digital ID scheme was not properly funded.
Consumer champion Martin Lewis, founder of MoneySavingExpert, gave a more mixed assessment. He called the move a “good totemic step” that would be welcomed by households, but separately cautioned that most people would notice little practical benefit, particularly with Ofgem’s price cap expected to rise by around 3.1% in October — a jump that could outweigh the saving from the VAT cut.
The policy is only possible because the UK left the EU; under EU rules VAT on domestic energy could not previously fall below 5%. The change will not apply in Northern Ireland, which remains bound by separate EU VAT arrangements.
Mr Burnham’s first day also saw a wider reshuffle, with eleven ministers removed from Cabinet, and appointments confirmed for Angela Rayner, Lucy Powell, Louise Haigh, Anneliese Midgley, Lisa Nandy and Bridget Phillipson. The prime minister also held introductory calls with US President Donald Trump and Ukrainian President Volodymyr Zelenskyy, with Trump describing the exchange on Truth Social as a “very good conversation.”
Further cost-of-living measures are expected in the coming days, with Mr Burnham telling reporters in Downing Street’s rose garden that ministers were looking at a range of options, including rent controls and support with bus fares, and would set out further announcements shortly.
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