Levies And VAT On Table As Government Looks To Reduce Energy Bills In Budget
The government is exploring changes to VAT and levies on energy bills to drive down costs. (Alamy)
3 min read
The government is exploring changes around VAT and levies on energy bills as part of policies to tackle the cost of living in the Budget, PoliticsHome understands.
Several sources have told PoliticsHome that changes to VAT or levies on energy bills are "on the table" as Chancellor Rachel Reeves finalises what she will announce on 26 November.
In a speech from Downing Street on Tuesday, Reeves said the Budget would aim to "improve the cost of living", and pledged not to take the UK back to austerity.
She also warned that "each of us must do our bit" to recover from "years of economic mismanagement" by previous Conservative administrations — in comments widely interpreted as another hint that further tax rises are coming.
The cost of energy continues to be a pressure on household finances, with the UK's energy prices among the highest in the world.
In October, the energy price cap, set by regulator Ofgem, rose to 2 per cent to £1,755 for the typical household. This is significantly higher than the level that energy bills were at before Russia invaded Ukraine in 2022. The price cap was £1,084 in the summer of 2021. Ofgem estimates that unpaid bills and fees in the energy system total £4.4bn.
Changes to VAT on energy bills are seen as a relatively straightforward measure. Currently, there is 5 per cent VAT on energy bills, with PoliticsHome understanding that Number 10 has not ruled out abolishing the VAT in a bid to tackle the rising costs of energy.
Last month, Energy Secretary Ed Miliband told the BBC that the government was "looking at all of these issues" when asked if VAT on energy bills would be scrapped in the budget.
However, the idea has been criticised by some experts, who warn that it would predominantly benefit wealthier households with larger energy bills and incentivise greater energy use. Tim Leunig, a former government adviser and visiting professor at the London School of Economics, told The Guardian: “This is a terrible idea. Most of the benefit would go to people in larger houses with larger-than-average electricity bills.”
Another approach, which PoliticsHome understands is also being considered, would be to adjust the levies on energy bills.
One of the levies that could be explored is the Energy Company Obligation, which was cut under the former Conservative prime minister David Cameron.
This levy is currently raising around £1.1bn towards heat and efficiency measures, operating by adding 0.3p to each unit of gas used, and 0.87p to each unit of gas used, Nesta estimates.
Another that could be explored is the Renewables Obligation scheme. This levy on energy bills currently costs the average household around £86 extra a year, raising around £3bn annually, according to the same analysis. The RO, which is set to be wound down by 2027, was set up to fund the support of developing renewable energy infrastructure in the UK.
PoliticsHome understands that the way these levies could be scrapped or changed could include recuperating the money from taxation, instead of energy bills, to alleviate financial pressure on households struggling with rising costs.
A Treasury spokesperson told PoliticsHome: “We do not comment on speculation around future changes to tax policy outside of fiscal events.”
