Upcoming energy price rises will ‘wipe out all savings from VAT cut’, says Martin Lewis

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The new Prime Minister's first major policy announcement outlined an £850 million tax cut on electricity bills, but he has faced questions over how it will be funded.

From October 1, electricity bills will be VAT free, saving households around £45 per year as part of the Prime Minister’s promise to help ease cost-of-living pressures.

However, money expert Martin Lewis has questioned the impact the cuts will actually have on people's savings.

He explained that while people will see a 4.8% cut to bills with the reduction of VAT, the price cap is predicted to rise by 5.1%.
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"So effectively, the rise that is planned into the system is going to wipe out all the savings from the energy cut," he said.

"And it is touch and go whether on October 1 we will actually see the amount that people pay, if they're on the price cap, go up a little bit, stay the same, or come down only a tiny bit— nowhere near the £46 that's promised."

He added: "This cut is going to save people 4.8% on what they would have paid anyway, but it is not going to put a 4.8% saving in most people's pockets."

Despite his doubts about the impact of Mr Burnham's first money-saving policy, he said he is encouraged by what he is hearing in the early days of this new premiership.

He said: "I think what you have to do is see these as a totem. They haven't got a fiscal event. There isn't a budget. The room to move is relatively limited until we get to that point."

"I think while the amount of money coming off energy bills is not going to... no one's going to notice the difference, and the bus fares don't affect everyone," he added.

"I still think it's totems of saying we are thinking about the cost of living and what people are paying.

"There's whole long lists, I've got massive lists on my computer of things that could be done, but I think if you look at direction of travel and you look more — this is a signal of intent rather than the signal of what's actually going to happen.

"So yes, I am encouraged by it, but of course the jury is going to be out for quite a while."

The Government said the electricity bill VAT cut would be funded in part by scrapping Sir Keir Starmer’s digital ID project, which had been estimated to cost about £600 million a year over three years.

But that falls short of the estimated £850 million hit to tax revenues from the VAT cut, and funding for digital ID was meant to have come from unidentified Whitehall savings.

Darren Jones, who was the minister in charge of the digital ID scheme, said in a post on X: “Good news that VAT will be cut on electricity bills. It’s a simple way for families to save a few quid, and to mechanically help to keep inflation that little bit lower.

“But the DigitalID program was unfunded.

“The government will have to set out how it will pay for its new policies at the budget.”

His public criticism is a sign that Mr Burnham’s premiership could face problems from Starmer loyalists.

The Government said the £1.8 billion cost of the digital ID scheme over three years had been “scored” by the Office for Budget Responsibility, meaning the money would have had to be found.

The money that would have been used has been reprioritised to fund the tax cut, ministers said.

Mr Burnham told the Cabinet that they needed to examine “all possible ways” to help families struggling with high costs.