The energy price cap for October 2026 lands in late August, and it will be the first one to arrive with VAT on electricity set to zero. Dispatch Times rebuilt the cap from Ofgem’s own published unit rates to work out what that is worth in cash. The answer is £43.51 a year for a typical household — against the £221.47 the July cap had already added.
The tax cut gives back just under a fifth of what the last rise took. That is not an argument against it. It is the scale of it, and it has not been reported.
How we worked it out
Ofgem publishes the actual numbers behind the cap: a unit rate in pence per kilowatt hour and a daily standing charge, for gas and electricity separately. It also states plainly that 5% VAT is one of the costs built into the cap. That is the hook the Treasury has pulled.
We took the current figures for the period from 1 July to 30 September 2026, applied Ofgem’s typical domestic consumption values of 2,700 kWh of electricity and 11,500 kWh of gas a year, and rebuilt the annual bill from scratch. It came to £1,862.66. Ofgem’s published cap is £1,862. That 66p gap tells us the method is sound, so the same method can be trusted on the parts nobody publishes.
| Component | 1 Apr – 30 Jun 2026 | 1 Jul – 30 Sep 2026 | Change |
|---|---|---|---|
| Electricity unit rate | 24.67p/kWh | 26.11p/kWh | +5.8% |
| Electricity standing charge | 57.21p/day | 57.19p/day | −0.03% |
| Gas unit rate | 5.74p/kWh | 7.33p/kWh | +27.7% |
| Gas standing charge | 29.09p/day | 29.04p/day | −0.2% |
The relief is aimed at the fuel that barely moved
Split the July increase by fuel and the shape of the problem appears immediately. Of the £221.47 added to the typical annual bill, £182.67 was gas and only £38.81 was electricity. Gas did 82 per cent of the damage.
The VAT cut applies to electricity only. Gas keeps its 5%.
There is a defensible reason for that. Electricity is the fuel every household has, including the several million homes off the gas grid entirely, and it is the fuel that heat pumps and electric heating run on. Targeting it reaches more people than a gas measure would, and it does not cut against decarbonisation. But it does mean the relief has been pointed away from the line on the bill that actually rose.
What the cut is worth, line by line
Strip the 5% out of the current electricity figures and the unit rate falls from 26.11p to 24.87p, a saving of 1.24p per kilowatt hour. The daily standing charge falls from 57.19p to 54.47p, worth 2.72p a day, or £9.94 across a year.
For the typical household that is £33.57 off the units and £9.94 off the standing charge: £43.51 in total. The government’s own estimate is “around £45”. Our independent calculation lands within £1.50 of it, which is a rare thing and worth saying — the figure being briefed is honest.
Who gains most is not who you would assume
A VAT cut is proportional. It removes a percentage, so the more electricity you buy, the more you keep. We ran it across Ofgem’s low, medium and high consumption profiles.
| Household | Annual electricity use | VAT saving from 1 Oct |
|---|---|---|
| Low user | 1,800 kWh | £32.32 |
| Typical user | 2,700 kWh | £43.51 |
| High user | 4,100 kWh | £60.92 |
A large, high-consuming home keeps nearly twice as much cash as a small flat. Chancellor John Healey said the change “supports the poorest households, who spend a higher percentage of their income on energy bills”, and as a statement about proportion of income that is correct. As a statement about pounds it is not: in cash terms the biggest cheques go to the biggest houses. Both things are true at once, and the distinction is worth keeping hold of.
The £315 you pay before you use anything
Standing charges are the part of the bill that no amount of thrift touches. At current rates they run to 86.23p a day across both fuels — £314.74 a year, or 16.9 per cent of the £1,862 cap, before a single kilowatt hour is used.
The VAT cut takes that fixed block down to £304.80. Just under a tenner.
For a genuinely low-consuming household — a small flat on 1,800 kWh of electricity and 7,000 kWh of gas — the annual bill works out at roughly £1,298, of which the standing charges are 24 per cent. That is the group for whom the cap headline means least, because a quarter of what they pay is not a price at all. Ofgem has an open standing charges review; it has not yet produced a change.
Northern Ireland cannot have it
One detail in the announcement has been almost entirely overlooked. The zero rate cannot be applied in Northern Ireland, because under the terms of the UK’s exit from the EU, EU VAT rules still govern goods there — and electricity is a good. Implementing it would require agreement from the EU.
Instead the Northern Ireland Executive receives comparable funding to support households its own way. Whether that reaches individual bills in October, and in what form, is a decision for Stormont rather than Westminster — so a household in Belfast and a household in Bristol will not see the same thing happen on the same day.
Funded for one year, from a three-year saving
The measure costs an estimated £850 million in 2026-27. It is paid for by cancelling the Digital ID programme, which was budgeted at £1.8 billion over three years.
Read that carefully. One year of a tax cut has been funded out of three years of a cancelled programme, and the Treasury has been explicit that the action “applies and is funded for this financial year”. Anything beyond that goes to the Budget on the back of an OBR forecast. The zero rate is not yet a permanent feature of the bill, and the arithmetic of extending it into 2027-28 has not been published.
The Treasury also estimates the cut will pull CPI inflation down by about 0.10 percentage points and RPI by 0.14. That is a real second-order benefit, since a string of index-linked payments and contracts follow those figures — and it sits alongside the wider pressure on the public finances set out when the OBR published its outlook.
What to watch in late August
Ofgem sets the cap every three months and will publish the October level in late August. Three things are worth checking when it lands.
First, whether the headline figure is quoted with the VAT cut already inside it. It should be, since VAT is a component of the cap — but a fall driven by a tax change is not the same as a fall in the cost of energy, and the two will be easy to confuse.
Second, what happens to the gas unit rate, which is where the July damage was done and where no relief has been offered.
Third, whether suppliers pass the cut to customers on fixed tariffs. Those customers are not covered by the cap at all, and the government has said only that it “expects” suppliers to do so, citing the precedent of the £150 removed from bills at the last Budget. Expectation is not obligation. If you are on a fix, check your October statement against your September one — the electricity unit rate should fall by roughly 4.8 per cent even though nothing about your contract has changed.
Every figure above can be rebuilt from Ofgem’s published rates and a calculator. We will run the same exercise on the October cap when it is announced. For the other measures announced since the change of government, see our running summary of what has been promised on the cost of living so far.
