Heat Pumps & Energy Bills

Electricity VAT Cut: Why Heat Pump Owners Could Save 2 to 4 Times More

The Government's electricity VAT cut lands directly over the heating season. That makes the average £45 headline a particularly poor fit for homes heated by a heat pump.

Insight by Vector Heat

Vaillant air source heat pump installed beside a Lincolnshire home

Andy Burnham's new Government is removing VAT from domestic electricity bills. It says the average saving is £45 a year, which is welcome, although perhaps not quite “cancel the direct debit and alert the yacht broker” money.

But the average figure misses the biggest heat-pump story in the announcement: the cut runs from 1 October to 31 March, covering the heating season when a heat pump uses the great majority of its annual electricity. Heat-pump owners could therefore save two to four times more than the average household during the six-month VAT cut.

That is not because there is a secret heat-pump bonus, a special form or a man from Whitehall arriving with a novelty cheque. It is because the saving is proportional to how much electricity you buy. The Government has placed its six-month electricity tax cut over the six months when heat-pump demand is highest.

The important word is could. Your saving depends on your actual electricity use, tariff and heat-pump performance. I have shown the maths below so you can check the claim rather than being asked to trust the headline on its own.

The Quick Answer

Domestic electricity VAT in England, Scotland and Wales is due to fall from 5% to 0% from 1 October 2026 to 31 March 2027. Suppliers are expected to apply it automatically, including on fixed tariffs.

For heat-pump owners, the timing is the prize. The cut covers the heating season. In the worked 80/20 example below, around 82% of a heat pump's annual electricity use falls inside the VAT-free window, reducing its whole-year heat-pump electricity cost by about 3.9% before other tariff changes.

The Government's £45 figure is the annualised effect on a typical electricity bill. The Institute for Fiscal Studies estimates the average household will actually receive about £25 during the six months.

Using transparent winter electricity scenarios, a heat-pump household could save roughly £56, £75 or £100 in total. That is about 2.2, 3 or 4 times the £25 average. These are examples, not promises.

Starts

1 October 2026

Ends

31 March 2027

VAT rate

5% falls to 0%

Average

About £25 in six months

Heat pumps

Potentially 2-4x more

Electricity VAT Cut: The Key Facts

Question	Answer
What is changing?	VAT on domestic electricity falls from 5% to 0%
When does it start?	1 October 2026
When does the confirmed period end?	31 March 2027
Is gas included?	No. Gas keeps its 5% VAT
Do you need to apply?	No. Suppliers are expected to apply it automatically
Are fixed tariffs included?	Yes, suppliers are expected to pass it through on fixes too
What about prepayment and smart tariffs?	The reduction applies to domestic electricity across tariff types
Government headline saving	About £45 on an annualised typical electricity bill
IFS estimate for the actual six months	About £25 for the average household
Why can heat-pump homes save more?	They buy more electricity, especially from October to March

That is the whole announcement in one table. Unlike most energy policy, it does fit on a screen without a consultation document, three acronyms and a lie down.

What Exactly Has Andy Burnham's Government Announced?

On 21 July 2026, Prime Minister Andy Burnham's Government announced that VAT on domestic electricity would be removed from 1 October. The rate is currently 5%; it will be zero-rated for the rest of the financial year.

The official Government announcement says:

the change starts on 1 October 2026;
it is funded for this financial year;
it is expected to cost around £850 million in 2026/27;
suppliers are expected to pass it on to all customers, including people on fixed tariffs;
it should reduce the annual Ofgem electricity price-cap figure by about £45.

What the GOV.UK Wording Really Means

The Government's own announcement puts the headline like this:

“Cutting VAT on electricity bills is expected to take around £45 off the yearly Ofgem price cap in October.”
GOV.UK, 21 July 2026

The words “yearly Ofgem price cap” are doing important work. The £45 is an annualised typical-use figure, not a promised £45 over the confirmed six months. For that actual October-to-March window, the IFS estimates an average household benefit of about £25. Heat-pump owners need their own calculation because their electricity use is much more concentrated in those months.

In Great Britain, you should not need to fill in a form, call your supplier or send a photograph of yourself looking cold. The reduction should appear automatically in the electricity rates you pay.

Northern Ireland is different. Under the post-EU-exit arrangements, EU VAT rules apply to goods there, including electricity. The Government says the Northern Ireland Executive will receive comparable funding so households can receive similar support, but the delivery mechanism is not the same VAT change.

One more detail matters: this applies to electricity, not gas. That is why the announcement has a much bigger heating implication than the general coverage suggests.

Why Heat Pump Owners Could Save 2 to 4 Times More

First, the cut covers the heating season. It starts as heat pumps begin their serious work in October and ends as space-heating demand falls away in March. This is not a random six-month slice of the year for a heat-pump household; it is the valuable half.

A gas-heated household buys electricity for lights, appliances, cooking and all the mysterious devices that apparently need charging every evening. It buys gas for most of its space heating and hot water. A heat-pump household moves most or all of that heating demand onto the electricity bill.

Heat pumps are efficient because they move heat rather than creating every unit from resistance electricity. A properly designed system can deliver several units of useful heat for each unit of electricity it buys. But it still buys more electricity than the same home would have used for appliances alone, and it buys most of that extra electricity in winter.

That creates three reasons heat-pump owners benefit more:

The valuable months are all included. October to March contains most space-heating demand.
The saving follows electricity use. There is no flat £25 or £45 payment. More qualifying electricity spend means more VAT removed.
Gas is excluded. An electrically heated home gets tax relief on its heating fuel. A gas-heated home does not.

The IFS analysis makes the same broad point: the biggest cash savings go to households using the most electricity, including those with electricity-based heating.

This is why an “average household” calculation is not a useful answer for a heat-pump owner. It blends together homes with and without electric heating, then hands everyone the same headline.

Average figures are helpful until you are not average. Most households discover this immediately after receiving an energy bill, a trouser fitting or the seating plan at a wedding.

How Much of a Heat Pump's Annual Electricity Falls Inside the Cut?

There is no single percentage for every home. Weather, hot-water demand, insulation, system design and how long you keep the heating on all matter. But an 80/20 worked example shows why the timing is so favourable.

Assume 80% of the heat pump's annual electricity is used for space heating and 20% for hot water. Then assume 90% of that space-heating electricity is used from October to March, while hot water is spread evenly through the year.

Part of annual heat-pump electricity	Share used Oct-Mar	Annual use inside VAT-free window
Space heating: 80% of annual use	90%	72%
Hot water: 20% of annual use	50%	10%
Total		82%

So, in this illustration, 82% of the heat pump's annual electricity receives the VAT cut, even though the policy only lasts half the year.

The whole-year saving is not quite 4.9%. Removing 5% VAT from a VAT-inclusive bill reduces the covered spend by 5/105, or 4.76%. Therefore:

82% of annual use × 4.76% VAT reduction = 3.90% off the annual heat-pump electricity cost

If a particularly heating-heavy home used 90% of all its annual heat-pump electricity during October to March, the whole-year effect would be about 4.3%. The absolute ceiling is 4.76%, because that is the amount of VAT contained in the price already being paid.

The 80%, 90% and 50% shares are a transparent seasonal illustration, not a claim that every heat pump follows the same profile. Use your own monthly meter or app data for the real answer. The point remains unusually strong: the Government has put the tax cut around the part of the year heat-pump owners most need it.

Heat Pump VAT Saving Examples

Here is the transparent version of the two-to-four-times claim.

I have used:

the IFS £25 estimate as the average household's six-month saving;
the current Ofgem electricity rate of 26.11p/kWh, including VAT, as an illustration;
three possible amounts of additional electricity used by a heat pump from October to March.

The October rate is not yet confirmed, so this is a scenario table, not a tariff quote.

£56 saving

2,500kWh extra use · 2.2x average

£75 saving

4,000kWh extra use · 3x average

£100 saving

6,000kWh extra use · 4x average

Extra heat-pump electricity, Oct-Mar	Extra VAT removed	Estimated total saving	Compared with £25 average
2,500kWh	£31	£56	2.2 times
4,000kWh	£50	£75	3.0 times
6,000kWh	£75	£100	4.0 times

The formula for the additional heat-pump saving is:

heat-pump kWh × electricity unit rate including VAT × 5 ÷ 105

For the middle example: 4,000kWh × £0.2611 × 5 ÷ 105 = £49.73. Add the £25 baseline household estimate and the total is about £75, three times the average.

These Are Not “Typical Heat Pump” Promises

The electricity a heat pump uses depends on the property's heat loss, weather, floor area, comfort temperature, hot-water demand, flow temperature, emitters, controls, system efficiency, immersion use, solar generation and battery operation.

A small, low-heat-loss home with an excellent system could use less than the first example and save less than twice the average. A larger home, high heat demand or badly performing system could exceed the top example.

Also, saving £100 in VAT is not an efficiency badge. It means the household spent enough on electricity for £100 of VAT to have been present. The taxman is not handing out Heat Geek certificates.

How Different Heating Systems Benefit

Heating setup	What receives 0% VAT?	Likely effect
Gas boiler	Normal household electricity only	Around the general range; gas heating keeps 5% VAT
Oil or LPG boiler	Normal household electricity only	Heating fuel is outside this electricity-only cut
Air source heat pump	Household use plus electricity for heating and hot water	Strong benefit; often above the average saving
Ground source heat pump	Household use plus heating electricity	Strong benefit; exact saving follows electrical input
Storage heaters	Household use plus direct electric heating	Potentially large cash saving
Electric boiler or panel heaters	Household use plus direct electric heating	Large percentage applied to a large electricity bill
Heat pump plus solar	Electricity imported from the grid	Lower imports mean less VAT to remove
Heat pump plus EV	Heating, household use and home charging	Potentially larger saving; tariff choice can matter more

Direct electric heating can save even more cash than a heat pump under this policy because it consumes far more electricity to provide the same useful heat. That does not make it cheaper heating. It makes it a bigger electricity bill with 4.76% removed. That is like celebrating a larger supermarket coupon after buying the entire aisle.

My View: The Right Direction, but an Undersized Policy

In my view, removing VAT from electricity and leaving it on gas is the right direction.

For years, the Government has encouraged people to buy heat pumps, electric cars and other low-carbon technology while allowing electricity to remain disproportionately expensive compared with gas. That is a difficult sales pitch: “Please electrify your home. We have arranged the tax and levy system to make the fuel look expensive.”

This announcement begins to correct that. It rewards homes that have already electrified and slightly improves the economics for people considering it.

But it is too small and too temporary to solve the real problem.

Heat-pump running-cost confidence needs a long-term electricity price that makes sense against gas, not a six-month tax holiday that disappears just as everyone has learned what it does. Installations, finance and heating-system lifetimes are measured in years. Policy should be as well.

I would like to see permanent rebalancing of electricity and gas costs, with proper protection for households that cannot easily change heating system. The aim should be simple: if we want people to choose efficient electric heating, do not load the dice against the electricity.

There is a fair criticism that a proportional cut gives the largest cash saving to the highest users, rather than targeting support at the households under the most financial pressure. The IFS makes that point clearly. A social tariff or targeted support can do a different job.

But as an electrification policy, this is sensible. It is just the opening adjustment, not the finished design.

Heating engineers are familiar with this sort of thing. Someone has finally turned the correct valve; I would just like them to open it further and stop announcing that the whole system is balanced.

What Does the VAT Cut Do to Heat Pump Versus Gas Boiler Running Costs?

The important number is not just the electricity price. It is the ratio between electricity and gas prices.

Under the July-September 2026 Ofgem cap, the average direct-debit rates are 26.11p/kWh for electricity and 7.33p/kWh for gas, both including 5% VAT. That is an electricity-to-gas price ratio of about 3.56.

Remove VAT from electricity only and, if every other component stayed the same, the electricity rate would be 24.87p/kWh. Gas remains at 7.33p. The ratio becomes about 3.39.

Illustration using July cap rates	Electricity	Gas	Price ratio
Before electricity VAT removal	26.11p/kWh	7.33p/kWh	3.56
After electricity VAT removal only	24.87p/kWh	7.33p/kWh	3.39

Again, 24.87p is not a forecast October tariff. It isolates the VAT effect so we can see what the policy does.

Nesta estimates broad running-cost parity at a price ratio around 3.3 for a heat pump achieving a coefficient of performance of 2.8 versus a gas boiler operating at about 85% efficiency.

The VAT cut therefore moves the maths meaningfully closer to that line. A well-designed heat pump performing above that basic level, or using a good time-of-use tariff, can already do better. A poorly designed system can still do worse.

That is why I like the direction but would not pretend the job is complete. The policy moves the goalposts in the right direction. It does not score the goal for you.

Who Gets the Electricity VAT Cut?

The Government expects suppliers to pass the reduction through to domestic electricity customers in England, Scotland and Wales. That includes:

standard variable tariffs;
fixed tariffs;
prepayment meters;
Economy 7;
smart and time-of-use tariffs;
heat-pump tariffs;
domestic EV tariffs.

You should not need to apply.

If somebody texts, emails or calls asking for bank details to “release your electricity VAT refund,” treat it as a scam. The real change should happen on the bill, not through a link designed by a criminal with a questionable grasp of punctuation.

Small businesses and qualifying organisations can have different VAT treatment depending on usage and status. This article is about domestic bills; businesses should check their own supply and tax position rather than borrowing household maths and hoping HMRC appreciates the creativity.

How to Calculate Your Own Electricity VAT Saving

If your bill or tariff price includes VAT, use this formula:

Electricity VAT saving = VAT-inclusive electricity charges × 5 ÷ 105

Six-month electricity charges including VAT	VAT removed
£525	£25.00
£1,000	£47.62
£1,575	£75.00
£2,100	£100.00

Why divide by 105 rather than simply take 5%? Because VAT was added to the pre-tax price. If the energy and charges cost £100 before VAT, the total is £105. Removing VAT saves £5 from the £105 you were paying, which is 4.76% of the VAT-inclusive total.

For the best estimate for your home:

Find your electricity spend or consumption from October 2025 to March 2026.
If using spend including VAT, multiply it by 5/105.
If using kWh, multiply by your expected VAT-inclusive unit price, then by 5/105.
Add the VAT saving on the electricity standing charge if it is not already included.
Remember that new tariff rates and different weather can change this winter's actual bill.

This calculation tells you the VAT effect. It cannot predict the rest of the energy market, because sadly the formula for that appears to involve geopolitics, commodity trading and someone saying “unprecedented” on the news.

Why Heat Pump Design Still Matters More Than the Tax Cut

Removing VAT makes every unit of imported electricity cheaper. It does not change how many units your heat pump needs. That is decided by the system and the property.

Lower flow temperatures improve heat-pump efficiency. The home still has to deliver enough heat at that lower temperature, which depends on heat loss, radiators or underfloor heating, pipework, controls and design. This is where the bigger savings live.

A 4.76% VAT reduction is useful. Improving a poor-performing system, choosing the right tariff or avoiding unnecessary immersion use can have a much larger effect. The Energy Saving Trust says heat-pump running costs depend on radiator sizing, tariff and controls, and that time-of-use tariffs can reduce costs significantly.

After surveying more than 5,000 properties, I do not see energy policy as a replacement for heat-loss calculations. I see it as one more input into the design.

If the heat pump is correctly sized, the emitters work at a low design flow temperature, the controls are commissioned properly and the tariff suits the household, the VAT cut is a welcome extra.

If the system is badly designed, zero VAT is 4.76% off the wrong answer.

Bosch air source heat pump installed beside a stone house — The VAT cut improves the tariff maths. Correct heat loss, emitters, flow temperature and controls still decide how much electricity the system needs.

What This Means if You Are Considering a Heat Pump

Do not buy a heat pump because of a six-month VAT cut. Do include the announcement in the wider calculation.

The questions that matter are:

What is the property's room-by-room heat loss?
What seasonal performance is the design expected to achieve?
What flow temperature will be required?
Which radiators or pipework need changing?
What will the heat pump use for space heating and hot water?
Which tariffs fit the household's routine?
Can gas be disconnected and its standing charge avoided?
Are solar and battery storage relevant?
What grant support is available?

For eligible homes in England and Wales, the Boiler Upgrade Scheme can provide substantial upfront support. The new electricity VAT cut then improves the running-cost side for the six-month period. They are separate policies doing separate jobs.

Our heat pump versus gas boiler guide explains the wider choice. If you want to understand why one heat pump can use much less electricity than another, read what makes air source heat pumps efficient. There is also a real oil-to-heat-pump, solar and battery case study showing how the whole system fits together.

Frequently Asked Questions

When Will VAT Be Removed From Electricity Bills?

The announced start date is 1 October 2026. In England, Scotland and Wales, domestic electricity VAT is due to fall from 5% to 0% automatically through suppliers.

Is Electricity VAT Being Removed Permanently?

No permanent removal has been confirmed. The immediate measure is funded through the end of the financial year on 31 March 2027. Any extension or longer-term policy is due to be considered separately.

How Much Will the Electricity VAT Cut Save Me?

Take your VAT-inclusive electricity charges during the policy period and multiply by 5/105. The Government gives a £45 annualised typical figure, while the IFS estimates about £25 for the average household during the actual six months. Higher electricity users save more in cash.

Why Do Heat Pump Owners Save More?

Heat-pump homes buy electricity for heating and hot water as well as normal household use. The cut also runs from October to March, when most space-heating electricity is consumed. Depending on usage, some heat-pump households could save around two to four times the average household amount.

Does the VAT Cut Apply to Gas?

No. The announcement removes VAT from domestic electricity, while gas keeps its 5% VAT. That slightly improves the relative running-cost position of heat pumps compared with gas boilers.

Does It Apply to Fixed and Smart Tariffs?

The Government expects suppliers to pass the reduction to all domestic customers, including those on fixed tariffs. It should also apply to prepayment, Economy 7 and smart or time-of-use electricity tariffs, because it changes the VAT applied to the domestic supply.

What Happens in Northern Ireland?

The electricity VAT mechanism cannot be applied in the same way because EU VAT rules continue to apply to goods in Northern Ireland. The Government says the Northern Ireland Executive will receive comparable funding to provide household support, with details to be confirmed locally.

Will the VAT Cut Make a Heat Pump Cheaper to Run Than a Gas Boiler?

It improves the comparison but does not guarantee the result for every home. Running cost depends on electricity and gas prices, heat-pump seasonal efficiency, boiler efficiency, tariff, heat loss and controls. Good design and a suitable tariff can make a bigger difference than the VAT cut alone.

My Final Take

The electricity VAT cut is good news for every domestic electricity customer and particularly good news for heat-pump owners.

The £45 headline is not the best number for the six-month policy. About £25 is a more realistic average starting point, and many heat-pump households could land around £56 to £100 under the scenarios shown here. That is roughly two to four times more.

My opinion is straightforward: the Government has made a sensible move by cutting the price of electricity without doing the same for gas. It recognises, at least in a small way, that asking people to electrify while penalising electricity is backwards.

Now make the rebalancing meaningful, predictable and permanent.

Because a six-month VAT holiday helps. A long-term energy policy would be even nicer. We heating engineers are greedy like that; once someone fixes part of the system, we start looking at the rest of it.

Considering a Heat Pump in Lincolnshire?

A tax cut can improve the tariff maths. A proper heat-loss survey improves the whole system maths. Vector Heat designs heat-pump systems around the property, the emitters, the flow temperature and the people living there.

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