Energy Secretary Ed Miliband has suggested the Government consider cutting the 5% VAT rate on household energy bills as ministers prepare measures to tackle the deepening cost of living crisis ahead of next month’s Budget.
Speaking to Laura Kuenssberg on BBC Sunday, Mr Miliband refused to confirm whether a VAT cut was being actively pursued, but acknowledged that households were struggling from high energy costs and that “all of these issues” were being looked at.
“We are facing a long-standing cost of living crisis that we as a government must address,” he said. “We are also facing a difficult financial situation… so of course we are dealing with all of those issues.”
Labor pledged before the last general election to cut average energy costs by £300 a year by 2030, a commitment Mr Miliband stressed remains in place. However, he argued that long-term price stability depends on an accelerated transition away from fossil fuels and towards cleaner, domestically produced energy.
“There is only one way to lower the bills: clean, home-grown energy that we control, so we are not at the behest of oil states and dictators,” he said.
According to Nesta, abolishing the current 5% VAT rate on domestic energy bills would save the average household around £86 a year and cost the Treasury an estimated £2.5 billion annually.
Energy prices surged in 2021 following Russia’s invasion of Ukraine and, although down from their peak, remain historically high. Earlier this month Ofgem increased its price cap by 2%, taking the typical annual bill to £1,755, up £35 on the previous quarter.
A Treasury spokesman declined to comment on possible tax changes, saying only: “We do not comment on speculation.”
Chancellor Rachel Reeves has already hinted that “targeted action” on energy bills will be considered ahead of the November 26 Budget. Daily Sparkz believes this could include reducing so-called “political costs” – regulatory levies that currently account for about 16% of electricity bills and 6% of gas bills and enable the funding of green subsidies and social programs.
The Climate Action Committee has long recommended shifting these levies from bills to general taxation to ensure households can feel the financial benefits of the net zero transition more directly.
Mr Miliband acknowledged the debate, saying: “That is always a judgment from the Chancellor… but we know we have inherited difficult financial circumstances.” He added that upgrading infrastructure requires ongoing investment, which means striking a “balance” between public spending and consumer taxes.
The issue of energy affordability has become a key political area of contention, with the Conservatives and Reform UK arguing that net zero policies have driven up costs.
The Conservatives have promised to scrap the Climate Change Act and scrap carbon taxes on electricity production, while Reform has proposed rolling back incentives for renewable energy. Shadow Energy Minister Claire Coutinho claimed such measures could cut bills by 20%.
In contrast, the Liberal Democrats accused both parties of encouraging dependence on fossil fuels and argued that energy security depends on cleaner domestic energy production. Pippa Heylings, the party’s energy spokeswoman, called for electricity prices to be decoupled from gas markets, saying: “People don’t see the benefit of cheap renewable electricity.”
Green Party leader Zack Polanski reiterated his party’s call to nationalize energy companies and introduce a tax on carbon emissions to spur investment in green infrastructure. He rejected claims that companies would pass on the costs and insisted the policy would be aimed at large corporations rather than SMEs.
With household energy bills still high and winter approaching, expectations are rising for a significant intervention in the November budget. Whether the government chooses a sales tax cut, tax reform, targeted subsidies or accelerated investment in clean energy, the political stakes are high as affordability and energy security remain the public’s top concerns.
