Proposals under consideration by Chancellor Rachel Reeves aimed at reducing electricity bills, such as eliminating the 5% VAT charge, have raised concerns among experts. These proposals are seen as a potential way to provide immediate relief to consumers amidst rising living costs, particularly affecting the housing market.
Expert commentary suggests that removing the VAT would disproportionately benefit higher-income households with larger energy consumption. Tim Leunig, a former government adviser, indicated that the majority of the savings would go to those with more substantial homes. A former energy department official echoed this sentiment, stating that while tax removal might appear straightforward and appealing to voters, it does not align with the principle of distributing financial responsibility fairly.
Chancellor Reeves faces significant challenges ahead of a budget announcement on November 26, where she will need to address an anticipated £30 billion shortfall without intensifying the cost pressures on consumers. Among the measures being reviewed is the removal of the VAT, which could cost the treasury approximately £2.5 billion annually, translating to an average household saving of about £86.
Energy Secretary Ed Miliband acknowledged the ongoing affordability crisis and emphasized the government’s duty to tackle it while navigating challenging fiscal circumstances. However, concerns remain that such a tax reduction could escalate carbon emissions and risk damaging relations with the EU, which mandates a minimum VAT rate.
Alternative approaches to reducing bills are also under consideration, including shifting green levies from electricity to gas bills. This potential strategy might encourage the adoption of climate-friendly heat pumps over gas boilers. Experts agree this transition is crucial for achieving decarbonization goals.
The government may also look at previous measures, such as the £400 rebate provided to households in 2022, though critics caution such actions could complicate administrative processes and incur significant costs.
Source: https://www.theguardian.com/uk-news/2025/nov/02/rachel-reevess-5-vat-cut-on-electricity-bills-will-backfire-experts-say