VAT on electricity goes to zero on 1 October — and the bill still goes up
VAT on domestic electricity falls from 5% to nothing, taking about £45 a year off the Ofgem cap. At the same time the cap itself rises 4%, to £1,723 a year for a typical home. Net effect: you pay more, but less than you would have.
Two things change in electricity bills on 1 October, and they pull in opposite directions. The tax on domestic electricity goes to zero; the Ofgem price cap goes up. Here is what that does to an actual payment.
VAT: 5% to 0%
The cut was announced on 21 July 2026, on the second day of Andy Burnham's premiership. VAT on domestic electricity falls from 5% to zero from 1 October. The government's own estimate is that this takes about £45 a year off the Ofgem cap.
The details matter. It covers electricity only — gas still carries VAT at 5%. And it runs within the current financial year: the announcement says the action is "funded for this financial year", which makes it temporary rather than permanent. The cost is around £850 million in 2026-27, paid for by cancelling the £1.8 billion Digital ID programme.
Nothing needs to be claimed. Suppliers are expected to pass the reduction to every customer, including those on fixed tariffs. Small businesses that pay energy VAT at the domestic rate, charities and residential care homes benefit too.
The Ofgem cap: up 4%
On 26 August Ofgem set the terms for the quarter running 1 October to 31 December 2026. For a typical dual-fuel household paying by direct debit the cap will be £1,723 a year — £60 a year more, about £5 a month, or 4% up on the current quarter.
The driver is wholesale gas. Ofgem points squarely at the ongoing conflict in the Middle East and the volatility of global gas markets.
The rates from 1 October
For direct debit customers:
- Electricity: 26.32p per kWh, standing charge 54.83p a day. No VAT from 1 October 2026 to 31 March 2027.
- Gas: 7.97p per kWh, standing charge 29.68p a day. Includes VAT at 5%.
Remember what the cap actually caps: the unit price and the standing charge, not the total. What you pay depends on what you use. The £1,723 figure describes a household with typical consumption; it is not a ceiling on your bill.
What to do before 1 October
Take a meter reading at the end of September and send it to your supplier. Consumption either side of the change is then split on real figures rather than an estimate. It is the simplest thing that reliably saves money at every tariff change.
Check a fixed deal. A change in the cap does not affect fixed tariffs — but the zero VAT rate on electricity should still reach them. If VAT is still on the electricity line of an October bill on a fixed tariff, that is worth querying with the supplier.
If the bill is unaffordable, contact the supplier first. Ofgem's advice is to get in touch as early as possible: suppliers have a duty to agree a payment plan, and a debt you raised yourself is treated differently from one they had to chase.
We do not give individual financial advice. Check rates and terms with your own supplier and on the Ofgem site — they change every quarter.
