What is on your energy bill, and what the VAT cut on electricity is worth

The bill now, taken apart

A £1,723 bill is seven Ofgem allowances plus VAT

For October to December 2026, the typical direct debit dual fuel bill under the Ofgem price cap is £1,723 a year, up from £1,663 in July to September 2026. On the older usage basis Ofgem used until June it would be £1,935, up from £1,862. Ofgem builds the bill from cost allowances published as percentages. Wholesale energy, including Contracts for Difference payments to low carbon generators, is the largest at 47 per cent, up from 44 per cent, because wholesale gas costs rose; Ofgem says gas bills rise 8 per cent this quarter while households that use no gas see a rise of less than 1 per cent. VAT is now charged only on the gas part of the bill: about £41 a year at typical use, against about £79 last quarter when electricity carried it too. The pound figures are this page's own arithmetic, so they do not sum exactly to the total.

Each Ofgem percentage multiplied by the £1,723 total; the VAT line is derived from Ofgem's published rates. The pound figures sum to £1,734 because Ofgem's percentages are independently rounded. See caveats.

The VAT cut on electricity

No VAT on household electricity until 31 March 2027: around £45 a year for a typical home

The government announced on 21 July 2026 that household electricity in Great Britain would be zero rated for VAT from 1 October 2026 to 31 March 2027, instead of the 5 per cent reduced rate it has carried since September 1997. The Value Added Tax (Supplies of Domestic Electricity) Order 2026 puts it into law. The government says it takes around £45 off the yearly Ofgem price cap, and Ofgem says the October cap would have been around £45 higher without it. Because the cut lasts six months, a typical household's actual saving over the period is roughly half the annual figure. The Prime Minister told Labour's conference on 29 September that people will see VAT disappear off their electricity bill this Thursday. Gas stays at 5 per cent.

How much you save

The VAT that would have been charged: 5 per cent on top of the electricity part of the bill. At Ofgem's typical 2,500 kWh a year on October rates that is about £43 a year on this page's arithmetic from Ofgem's published rates (the government and Ofgem, working from the full cap model, say around £45), or roughly half that across the six months. Homes that use more electricity, such as those heated by electricity, save proportionately more.

Who gets it

Households in England, Scotland and Wales. The government says small businesses that qualify for the domestic energy VAT relief and are not VAT registered, charities, and residential care homes eligible for the reduced rate also benefit.

Northern Ireland

Excluded, because under the terms of the UK's exit from the EU, EU VAT rates apply to electricity there. Instead the Department for the Economy says around 860,000 households will get a £63 discount off electricity bills from 6 October 2026.

Bills that span 1 October

HMRC's guidance lets suppliers split a bill by when the electricity was used, and recommends meter readings to do it.

What it costs

The government estimates around £850 million in 2026-27, on estimated electricity prices, with a final costing to come at a future fiscal event.

The history

VAT on domestic fuel was introduced at 8 per cent in April 1994. A planned rise to 17.5 per cent was defeated in the Commons in December 1994, and the rate was cut to 5 per cent from 1 September 1997.

“Cutting VAT on electricity bills is expected to take around £45 off the yearly Ofgem price cap in October.”

The policy cost story

Levies on bills are rising toward 18.5 billion pounds a year

Separate from the price cap's own 'Policy' cost line (which is one allowance among those above) is the wider set of environmental and social levies the government has decided to recover through energy bills, or through general taxation instead. The OBR's own verified forecast puts the total cost of these levies, Renewables Obligation, Contracts for Difference, the Capacity Market, the Warm Home Discount, the Green Gas Levy and the Sizewell C financing levy combined, at 13.99 billion pounds in 2025-26, rising to 18.51 billion pounds by 2030-31, an increase of about a third. Contracts for Difference and the Capacity Market do not sit inside the price cap's 'Policy' line at all: Ofgem books them inside the larger 'Wholesale' allowance instead, so a levy total built from the cap's own cost breakdown would understate the true policy burden.

Who actually pays is not published by DESNZ or Ofgem scheme by scheme. This page allocates the volumetric levies (Renewables Obligation, Contracts for Difference, the Capacity Market, the Green Gas Levy and the Sizewell C levy) between domestic and non-domestic bills in proportion to each sector's share of billed electricity consumption: 94.4 terawatt hours domestic against 178.0 terawatt hours non-domestic, 34.66 per cent against 65.34 per cent, from DESNZ's 2025 Digest of UK Energy Statistics. The Warm Home Discount is held out of that split and counted entirely as a domestic cost, since it is a domestic only fuel poverty rebate by scheme design. This is a simplifying proxy, not an audited scheme by scheme allocation: DESNZ and Ofgem do not publish one, and energy intensive industries receive partial to near full exemption from some of these levies, which this method cannot capture, so the non-domestic share shown here is best read as an upper bound.

What changed in April 2026, almost unnoticed

The domestic policy allowance fell from 236 to 106 pounds

Ofgem's price cap 'Policy' cost allowance for a typical direct debit customer fell from 236 pounds a year (January to March 2026) to 106 pounds a year (April to June 2026), a fall of 130 pounds, 55 per cent, and it has stayed at that lower share since: every quarter since has kept Policy costs at about 6 per cent of the bill. Ofgem's own letter states the cause directly: measures announced at UK Budget 2025 took effect on 1 April 2026, cutting the Renewables Obligation allowance on bills by 75 per cent and moving the Energy Company Obligation and the Great British Insulation Scheme off bills altogether, funded instead from general taxation. Because this was delivered through a routine quarterly cap update rather than announced as a bill cut in its own right, it passed with comparatively little public attention despite being one of the larger single changes to what is on a typical bill this year.

Electricity costs more than three times as much per unit as gas

26.32 pence per kWh for electricity against 7.97 pence for gas

Under the price cap for October to December 2026, the GB average direct debit unit rate is 26.32 pence per kilowatt hour for electricity, now with no VAT, against 7.97 pence for gas including 5 per cent VAT, a ratio of 3.3 to one. Last quarter, with VAT on both, it was 26.11 pence against 7.33 pence. Daily standing charges are 54.83 pence for electricity against 29.68 pence for gas. The two fuels carry different policy levies: the Renewables Obligation, Contracts for Difference, the Capacity Market and the Sizewell C financing levy are recovered through electricity, while the Green Gas Levy, which funds biomethane in the gas grid, is the one levy on gas. That is part of why a home heated by electricity, such as with a heat pump, pays much more per unit of energy than one heated by gas, and why the VAT cut is worth more to homes that use a lot of electricity.

Related on this site

The bill total over time, and who cannot afford to pay it

This page decomposes a single quarter's bill into its cost components. For how the total bill has moved since the price cap began in January 2019, including the Energy Price Guarantee crisis peak and household energy debt, see the energy bills deep-dive. For who cannot afford to keep warm at all, see the fuel poverty deep-dive. See the energy bills deep-dive → · See the fuel poverty deep-dive →

Questions this raises

For what is on your bill