Prime Minister Andy Burnham has announced that VAT will be removed from domestic electricity bills from 1 October in one of his first decisions in office.
The Government said the measure is intended to help millions of households with electricity bills this winter and will be in place in time to affect the next Ofgem price cap. It applies for this financial year, with any further action to be considered at the Budget alongside an Office for Budget Responsibility forecast.
Ministers said the cost for this financial year will be funded by cancelling the £1.8 billion Digital ID programme. The Government said later decisions on longer-term funding will be made in line with its fiscal rules.
The cut is expected to reduce the yearly Ofgem price cap by about £45 in October. The Government said that would come on top of £150 removed from bills at the last Budget.
Suppliers are expected to pass on the VAT reduction to all customers, including those on fixed tariffs. The Government said suppliers had done so with the previous £150 reduction in costs announced at the last Budget.
Small businesses that qualify for domestic energy VAT relief and are not registered for VAT are also expected to benefit. Charities and residential care homes eligible for the reduced rate will be included as well.
Chancellor John Healey said the measure was funded from cancelling the Digital ID programme and was intended to support households while helping to bring down inflation. The Government said poorer households, which spend a higher share of income on energy bills, would be supported by the change.