UK chancellor mulls removing VAT from household energy bills ahead of autumn budget
Proposal could cut average bills by about £86 a year and cost the Treasury an estimated £1.75 billion, officials say
Chancellor of the Exchequer Rachel Reeves has asked officials to work up budget proposals that could include cutting the five percent VAT on domestic energy bills to zero, a move aimed at easing the cost of living ahead of her Nov. 26 budget.
Downing Street and Treasury officials said the plan is under active consideration and would save the average household roughly £86 a year while reducing central government receipts by an estimated £1.75 billion. The Times first reported the discussions and government sources told domestic press outlets that "all options were on the table" as ministers seek ways to bring down household energy costs.
A Treasury source told ministers at a recent cabinet meeting that both the chancellor and the prime minister were determined to tackle inflation and the cost of living and were focused on measures to reduce energy bills. Officials at the Department for Energy Security and Net Zero have also discussed parallel options, including removing green levies that currently add about £215 a year to household bills.
Reeves has signalled she is prepared to consider a range of fiscal measures as the government balances short-term relief for households with the longer-term need to stabilise public finances. "Our economy isn't broken, but it does feel stuck," Reeves said alongside a Treasury review of business property taxation, which proposes smoothing sharp increases in business rates when small firms expand.
The VAT proposal forms part of a wider package being examined by Number 10 and the Treasury as ministers press the energy secretary, Ed Miliband, to put forward viable steps before the autumn budget. Reports said Downing Street has asked the Department for Energy Security and Net Zero to model options that could be implemented quickly to relieve household bills.
There is scepticism among some parliamentarians and economists about whether the chancellor can afford such measures without offsetting revenue elsewhere. Many economists have told the Treasury that rising borrowing costs, a less certain growth outlook and the government's inability to implement planned welfare cuts mean ministers may need to find tens of billions of pounds in additional revenue over the coming years.
Officials say the VAT change would be relatively straightforward in administrative terms, since the current five percent rate on domestic energy is already established. However, the fiscal hit would be immediate and require either spending cuts, tax increases elsewhere, or increased borrowing to keep the public finances on course with the chancellor's longer-term targets.
The business property taxation review published alongside Reeves's remarks recommends reforms to reduce so-called "cliff edges" in business rates, change how the tax base is calculated and enhance reliefs for firms that increase property values through improvements. Reeves said making reliefs fairer and tackling sudden rises in liabilities for expanding small businesses were important for boosting growth.
Political pressure is mounting for tangible action on living costs ahead of the budget, with households and firms alike citing squeezed real incomes and uncertainty about future tax decisions. A decision to remove VAT from domestic energy would deliver a visible one-off easing for consumers, but ministers will face scrutiny over how the measure is funded and whether it delivers durable relief.
Downing Street and the Treasury gave no timetable for a final decision. Ministers are expected to set out more detailed proposals, and any fiscal offsets, in Reeves's statement to Parliament and the formal budget documents on Nov. 26.