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Rachel Reeves has decided not to cut value added tax on domestic energy bills in the Budget but is still pressing ahead with a package of support for household energy costs, including changes to green levies on electricity.
The UK chancellor had considered the VAT move as a way to reduce inflation, allowing faster interest rate cuts by the Bank of England. Reeves has said one of her Budget priorities will be tackling the cost of living.
But Huw Pill, chief economist at the BoE, last week downplayed the impact of a VAT cut on the BoE’s decision-making, arguing that the policy would have only a one-off effect on headline inflation. “We ought to be thinking about how that washes out,” he said.
An end to the current 5 per cent VAT applied on household energy bills will not be announced by the chancellor on Wednesday, according to people familiar with the matter. The policy would have cost about £2.5bn a year.
Instead, Reeves is expected to remove some social and environmental levies from electricity bills, the people said. Those levies at present fund a range of schemes that, for example, improve energy efficiency in homes and support lower-income households during the winter. The projects would instead be funded through general taxation.
Energy bills are a difficult issue for the Labour government, which has pledged to bring them down by up to £300 a year compared with 2024 levels by 2030. They are expected to rise in January, despite falling wholesale costs, because of charges added to bills to fund new power plants and grid upgrades.
Stripping costs from electricity bills rather than gas is likely to be welcomed by industry and consumer groups, which argue that incentivising consumers to move towards low-carbon sources of energy is more consistent with the government’s net zero targets.
Earlier this month, some of Britain’s largest energy companies, consumer groups and environmentalists urged Reeves to prioritise bringing down electricity bills in her upcoming Budget, even if it came at the expense of her plan to scrap VAT on energy.
The Treasury said: “We recognise energy costs are a significant concern for households, and this government is taking decisive action to tackle it, including extending the Warm Homes Discount and funding to help upgrade thousands of low-income homes to be warmer and more energy efficient.”