VAT on energy bills: households to pay extra £75 in tax on bills after energy price cap rise in October 2022

A typical UK household can now expect to pay £169 into the Government’s pocket in VAT on energy bills, with a “devastating” hike to the energy price cap set to raise an extra £75 for the taxman.

On Friday (26 August), regulator Ofgem announced it will raise the energy price cap by 80% from October – a move that will see annual bills for a typical household soar from £1,971 to £3,549.

The price cap limits how much companies can charge domestic customers for a unit of gas and electricity in England, Wales and Scotland. You can find all the latest news, analysis and comment in NationalWorld’s energy price cap liveblog.

Bills are forecast to rise further in January, when Ofgem revises its price cap once again. Industry analysts Cornwall Insights predict they will reach £5,387, before rising to £6,616 next April.

The Institute for Public Policy Research (IPPR) said today’s increase to the price cap would be “devastating for many families”, and called on the Government to urgently set out what extra measures will be put in place to help people through winter.

But besides higher costs for consumers, the move will also see a windfall for the Government through VAT contributions.

Consumers currently pay a VAT rate of 5% on their energy bills. Under the current price cap, around £94 out of the £1,971 typical household bill goes to the Government.

But from October, that same household will pay £169 to the taxman.

In the 2020/21 financial year, VAT takings from energy bills were worth £5.2 billion, HMRC data shows. In July, a report from price comparison website The Energy Shop estimated the Treasury would receive an extra £2.6 billion following October’s price rise.

The Government has faced calls to cut the VAT rate on energy bills, including from the Labour Party.

Conservative party leadership contender Rishi Sunak has pledged to temporarily suspend the levy for a year if he becomes prime minister. Frontrunner Liz Truss has said she would consider a similar move.

But the Resolution Foundation think tank said such a move would “barely touch the sides in terms of the extra support needed for households”.

“The new prime minister will need to think much bigger, for example with a new social tariff on bills or a combination of a universal bill reductions and solidarity taxes on better-off households to part-fund it,” said chief economist Mike Brewer.

Luke Murphy, associate fircetor for energy and climate at IPPR, said allowing the Ofgem announcement to go ahead without setting out what support would be coming dow the line “means that millions of people will fear the consequences” of the hike on their families.

Outgoing Prime Minister Boris Johnson said “extra cash” would be coming in September to help families.

Chancellor Nadhim Zahawi meanwhile said he is “working flat out” to develop policy options for the new prime minister to choose from, allowing them to “hit the ground running” when they are elected by Conservative Party members next month.

The Treasury was approached for comment.