Zero VAT on Electricity: What Changed on 1 October

VAT on household electricity bills in the UK fell from 5% to zero on 1 October 2026, a change the Government says is worth an average of £45 a year per household. It applies to the electricity unit charges and the standing charge, and prepayment top-ups no longer attract VAT either. It arrived on the same day as a 4% rise in the Ofgem energy price cap, which is why most households saw their total bill go up rather than down. This explainer sets out what the change does, what it does not do, and what is still unresolved ahead of the Budget on 28 October 2026.

What the change is

The Department for Energy Security and Net Zero set out the measure in a news story, “Breathing space on your energy bill”, published on 26 August 2026. It confirms that the Prime Minister cut taxes on electricity bills in July 2026, that the change took effect from 1 October 2026 for household bills, and that it is worth “an average of £45 per year”.

Three details are worth pulling out of that page.

First, the zero rate covers both the electricity you use and the standing charge — the daily fixed element that applies whether you use any electricity or not. Second, prepayment customers benefit directly: top-ups no longer attract VAT. Third, the relief is not limited to households. Small businesses, charities and residential care homes that already qualified for the reduced 5% rate move to 0% this winter.

Second-order point, and an important one: it is electricity only. The GOV.UK page does not extend the zero rate to gas. For a dual-fuel household, the gas side of the bill is unaffected.

Why bills still went up

The price cap set by Ofgem, the energy regulator, changed on the same date. In its announcement of 26 August 2026, Ofgem confirmed the cap for 1 October to 31 December 2026 at £1,723 a year for a typical household paying by direct debit for gas and electricity. That is a rise of 4%, or £60 a year — about £5 a month — from £1,663.

Ofgem’s own framing explains how the two changes interact. Because the Government removed VAT from domestic electricity bills, electricity bills will “remain broadly stable”, and without that change the rise would have been about £45 higher. The increase is being driven by gas: gas bills are rising 8%, while households that do not use gas see an increase of less than 1%.

So the honest summary of 1 October is not “bills fell”. It is that a tax cut on electricity absorbed most of a gas-driven increase, leaving a typical dual-fuel household about £60 a year worse off instead of about £105.

Who gains most, and who gains least

The structure of the change means the benefit is not evenly spread.

Households with no gas supply gain the most in proportional terms. Ofgem’s figures put their increase at under 1%, because the whole of their bill is electricity and the whole of it has come out of VAT.

Heat pump and electric heating households are in the same position, and are the group for whom a percentage cut on electricity is worth most in absolute money, because their consumption is high.

Dual-fuel households see the VAT saving largely offset by the 8% gas rise.

Prepayment customers benefit at the point of top-up rather than at a quarterly reconciliation, which makes the change more visible week to week.

Low-usage households gain least from the unit-rate element, though the removal of VAT from the standing charge still applies to them in full.

The cap is not a cap on bills, only on the unit rates and standing charges a supplier can charge on a default tariff. Anyone who uses more than the typical household will pay more than £1,723, and anyone on a fixed deal is outside the cap entirely.

The support that sits alongside it

The £150 Warm Home Discount runs again this winter. A GOV.UK news story published on 31 July 2026, “Millions reminded to get £150 off energy bills this winter”, puts eligibility at around six million households across Britain, with about 250,000 receiving the rebate automatically for the first time in Scotland.

The discount goes to bill payers on means-tested benefits; in England and Wales the qualifying benefits listed are Housing Benefit, income-related Employment and Support Allowance, Pension Credit and Universal Credit. To receive it automatically, a household needed to be named on its electricity bill by Sunday 23 August, because suppliers rely on customer records as of that date. The release flags two groups who can miss out: people who have recently moved house, and prepayment customers who top up by key or card and whose household account is not registered in their name. Full criteria are on the Warm Home Discount Scheme page on GOV.UK.

Ofgem’s advice to anyone struggling is to contact their supplier as soon as possible, and it says suppliers should agree affordable repayment plans.

What happens next

The immediate thing to watch is the Budget. A Treasury news story published on 31 July 2026 confirms that the Budget is set for Wednesday 28 October 2026, with John Healey MP as Chancellor. Energy costs, and the balance between taxing and levying them, are an obvious subject for it. Nothing about further changes has been announced, and speculation ahead of a Budget is not a basis for planning.

The second thing to watch is the next price cap period. The cap is reset quarterly, and the figures above run only to 31 December 2026. Because the VAT change is a permanent zero rate rather than a one-off rebate, its effect carries into subsequent cap periods, but the cap level itself will move again.

The third is the gap the change leaves. A zero rate on electricity and a 5% rate on gas pulls in the same direction as electrification, but it does nothing for the roughly four-fifths of homes on the gas grid in the months when heating dominates the bill. Whether that asymmetry is addressed is a policy question that has not been answered as of October 2026.

Frequently asked questions

Do I need to do anything to get the zero VAT rate? No. Suppliers apply it. The requirement to charge 5% VAT on domestic electricity ended on 1 October 2026, and that includes the standing charge and prepayment top-ups.

Why did my direct debit go up if VAT was removed? Most likely because you use gas. Ofgem’s October 2026 cap announcement has gas bills rising 8%, and the cap overall up 4% to £1,723 a year for a typical dual-fuel direct debit household. Electricity bills were expected to remain broadly stable.

Does the zero rate apply to gas? No. The GOV.UK announcement covers household electricity. It does not mention gas.

Does it apply to businesses? Small businesses, charities and residential care homes that already received the reduced 5% rate move to 0% this winter, according to the GOV.UK announcement. Larger commercial supplies are taxed differently and are not covered by that description.