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VAT On Household Electricity Goes To Zero: Most Business Bills Unchanged

ended 23. July 2026

A cut in VAT only reaches whoever actually bears the VAT. From 1 October 2026, VAT on domestic electricity falls from 5% to 0%, worth around £45 off the yearly Ofgem price cap. It is also temporary: the government says the measure “applies and is funded for this financial year”.

Here is the part the headline saving buries: a VAT-registered business on normal VAT accounting does not bear VAT on its electricity, it reclaims it as input tax, so moving the rate to zero leaves its net cost exactly where it was. On the flat rate scheme, where you do not recover input tax at all, the cut is a real saving. Draw more than the de minimis quantity for non-qualifying business use, an average of 33 kilowatt hours a day or 1,000 kilowatt hours a month, and the supply is charged the standard 20% anyway, so it is untouched too. The firms that genuinely gain sit in a narrow band: not registered for VAT, which for most means taxable turnover under the £90,000 threshold and no voluntary registration, and small enough that HMRC already treats the supply as domestic. The one-van trade, the home-based sole trader, the tiny unit. The government also names charities and residential care homes eligible for the reduced rate.

Gas is not part of the measure, it does not apply in Northern Ireland, and the pass-through is an expectation, not an obligation: all suppliers “are expected to pass the VAT reduction on to all customers, including those on fixed tariffs”. This is announced policy for a future date, with no legislation published yet.

  1. For households this is a straightforward saving. For business, a VAT cut is worth nothing to anyone who reclaims the VAT anyway. Is cutting VAT on electricity the right lever, or does it miss most of the firms people assume it helps?
  2. Between the £90,000 registration threshold and the 1,000 kilowatt hours a month de minimis limit, only a narrow band of micro-businesses gains anything, alongside the charities and care homes the government names. Is that a fair place for the line to fall, and who is left out by it?
  3. The measure is funded for this financial year only, gas is untouched and pass-through is only an expectation. What should owners and households actually check before 1 October? Do you have a client who assumes this will cut their business electricity bill when it will not? If so, please give as much colour and detail as possible.

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Editor
Harvey Dhillon
Founder & CEO at Zmartly
From 1 October, VAT on home electricity falls from 5 per cent to zero, about £45 a year off the Ofgem price cap. Households gain. Most businesses do not, because this cut follows who can reclaim VAT, not who is struggling.

Clients ask if their business bill drops. For most, no: a VAT registered firm claims that 5 per cent back today, so nothing changes. The gainers are narrow: firms not registered for VAT, usually those with taxable sales under £90,000, and flat rate scheme firms, which never reclaim. The one-van trade, the sole trader in a spare room. Charities and residential care homes gain too. Use more than an average of 33 kilowatt hours a day, or 1,000 a month, for business and you pay 20 per cent as before.

Check your VAT scheme now, then check the October bill: suppliers are expected to pass the cut on, not obliged to. Gas is untouched, Northern Ireland is out, and funding runs only to 31 March 2027. If you reclaim VAT, this is a smaller bill, not a smaller cost.