New UK PM Burnham cuts electricity VAT, NI exempted by EU rules
New British Prime Minister Andy Burnham has scrapped VAT on electricity bills to ease living costs, but the policy will not apply in Northern Ireland due to EU tax rules, exposing post-Brexit fiscal friction.
Andy Burnham has used his second day as British prime minister to announce a cut in value-added tax on electricity bills, saving households an average of £45 a year from October. The policy is the first in a series of planned interventions aimed at reducing living costs, funded by scrapping the previous government's digital ID scheme.
The tax cut will not extend to Northern Ireland. Consumers there must continue paying VAT on electricity to comply with commitments to adhere to EU tax laws. Instead, the government in London will transfer an equivalent amount of funding to the Northern Ireland executive to design its own cost-of-living package.
Beyond immediate household relief, narrowing the price gap between gas and electricity is designed to accelerate the replacement of gas boilers with electric heat pumps. Across Europe, policymakers have grappled with how to incentivize this transition without inflaming consumer bills, making the UK’s targeted tax adjustment a notable test case for decarbonizing home heating.
However, the fiscal mechanics of the announcement have already drawn fire from within the ruling party. Darren Jones, who was sacked as chief secretary to the prime minister in Burnham’s reshuffle, pointed out that the digital ID scheme was unfunded. “The government will have to set out how it will pay for its new policies at the budget,” Jones wrote on X, though he acknowledged the VAT cut would mechanically help keep inflation lower.
Jonathan Reynolds, the newly appointed business secretary, dismissed the funding concerns as a “straightforward switch spend” and a “statement of priorities.” Chancellor John Healey, a surprise appointment that bypassed intense lobbying from allies of Ed Miliband and Shabana Mahmood, will provide full costings at the budget later this year. The VAT reduction will cost the Treasury £850m in the 2026-27 financial year, against projected three-year savings of £1.8bn from cancelling the ID project.
The electricity tax cut sets the tone for Burnham’s administration, which also faces pressure to deliver on broader pledges to de-privatize utilities and end rough sleeping. Allies of the prime minister have indicated that further measures, including caps on bus fares and temporary private rent freezes, are under consideration.
