Households across Scotland will stop paying VAT on domestic electricity from 1 October, removing a tax that has until now added 5 per cent to qualifying electricity bills.Yet on the same day, Ofgem’s headline energy price-cap figure will rise by £60 a year.
For a representative household using both gas and electricity and paying by direct debit, the annualised figure moves from £1,663 to £1,723 for the period from October to December. That is an increase of 4 per cent, despite electricity itself becoming temporarily zero-rated for VAT.
The two changes appear contradictory until the bill is separated into its component parts.
Electricity VAT is falling. Electricity standing charges are also falling on the Great Britain average used by Ofgem. But gas unit prices are rising substantially, and Ofgem says most of the overall increase in the representative dual-fuel figure now comes from gas.
For Scottish households, the result will depend heavily on what energy they actually use, whether they heat their homes with gas, electricity or another fuel, where they live, how they pay and whether they are on a default or fixed tariff.
Electricity VAT goes from 5 per cent to zero
The change is not a rebate or a payment households need to apply for.
From 1 October 2026 until 31 March 2027, qualifying domestic electricity supplied in Scotland, England and Wales will be zero-rated for VAT.
The Treasury made the change through the Value Added Tax (Supplies of Domestic Electricity) Order 2026. The legislation modifies the existing VAT rules for the six-month period, creating a temporary zero rate for qualifying electricity supplies in Great Britain.
Other domestic fuels remain subject to the existing 5 per cent reduced VAT rate. That includes domestic gas.
For electricity customers, suppliers should simply stop adding VAT to the qualifying electricity portion of the bill.
The reduction also applies to electricity standing charges because those charges form part of the qualifying electricity supply.
Someone using a prepayment meter does not have to submit a claim either. VAT has previously been included when money is loaded on to the meter; from 1 October it should no longer be applied to qualifying electricity.
The Government says the measure is expected to save households an average of about £45 a year, although the actual saving depends on electricity consumption and tariff.
People who use more electricity than the average household will generally save more in cash terms because there is a larger electricity bill from which the 5 per cent tax is being removed.
The headline price cap still rises
At the same time, Ofgem is increasing the energy price cap for the final three months of 2026.
The regulator’s representative figure for a household using both gas and electricity and paying by direct debit rises from £1,663 to £1,723 a year if the new rates were maintained for 12 months.
That does not mean every household will receive a £1,723 bill.
The price cap is not a maximum amount a household can be charged regardless of consumption. It limits the unit rates and standing charges suppliers can apply to customers on standard variable tariffs. A household using more energy pays more; a household using less pays less.
Ofgem’s £1,723 figure is therefore an illustration based on its definition of typical domestic consumption.
The regulator says around 20 million households across Great Britain are on standard variable tariffs and are therefore covered directly by the cap. Around 11 million households are on fixed tariffs and will not have their contractual unit prices changed by the new cap.
Those fixed-tariff customers will nevertheless also receive the electricity VAT reduction.
Electricity barely moves after the tax cut
The average direct-debit electricity unit rate under the cap changes only slightly.
Between July and September the Great Britain average was 26.11 pence per kilowatt hour, including 5 per cent VAT. From 1 October the published average becomes 26.32 pence per kilowatt hour, with no VAT included.
The average electricity standing charge falls from 57.19 pence a day to 54.83 pence.
Those are Great Britain averages rather than universal Scottish tariffs. Electricity unit rates and standing charges vary between regions, including within Scotland, because network and other costs differ geographically.
Nevertheless, the national comparison shows what the VAT intervention has done to the electricity side of the calculation.
Wholesale and other underlying costs have risen enough that removing 5 per cent VAT does not produce a corresponding 5 per cent fall in the headline electricity unit rate. Instead, it has largely prevented those increases from producing a larger rise.
Ofgem says that without the VAT change, its representative annual price-cap figure would have been approximately £45 higher.
Gas is where the increase appears
The larger movement is in gas.
The average direct-debit gas unit rate rises from 7.33 pence per kilowatt hour to 7.97 pence from 1 October. The average gas standing charge rises from 29.04 pence to 29.68 pence a day.
VAT on gas remains at 5 per cent.
Ofgem says gas bills within its representative calculation are rising by about 8 per cent and that most of the increase in the overall price cap is therefore being driven by gas rather than electricity.
The regulator attributes the movement principally to higher international wholesale gas prices. It says wholesale prices rose by 11 per cent during the three months used in the latest calculation, with international market conditions remaining the dominant factor behind the change.
This matters because gas prices continue to influence the cost of electricity as well as the price households pay directly for gas.
Great Britain’s wholesale electricity market frequently uses gas-fired generation to meet marginal demand, meaning changes in international gas prices can still affect electricity costs even as more electricity is generated from renewables, nuclear and other sources.
Electric-only households face a different calculation
The headline £60 increase therefore does not describe every household equally.
Ofgem says households that do not use gas should experience a much smaller increase under the new cap, of less than 1 per cent on its representative calculations.
That distinction is particularly relevant in Scotland, where domestic energy systems vary considerably between cities, rural communities and islands.
A household heated principally by mains gas will experience the increase differently from a household using electric heating. Homes relying on heating oil, LPG or other fuels have yet another cost structure: their electricity benefits from the VAT reduction, but their principal heating fuel sits outside Ofgem’s domestic gas-and-electricity price cap.
For a household using significant amounts of electricity — including some homes with electric heating — removing electricity VAT can therefore have a larger effect than the £45 national-average saving quoted by the UK Government.
The saving is proportional to qualifying electricity expenditure rather than being a flat payment.
The price cap itself has also changed underneath the headline
There is another reason comparisons with previous headline price-cap figures need care.
Ofgem has updated the amount of energy it assumes a typical household consumes.
The regulator says households are now using around 7 per cent less electricity and 17 per cent less gas than under its previous typical-consumption assumptions. It has therefore reduced the Typical Domestic Consumption Values used to illustrate the cap.
Using the new consumption assumptions, the representative figure moves from £1,663 to £1,723.
Ofgem says that if the older 2023 consumption assumptions were still used, the equivalent figures would be £1,862 before the October change and £1,935 afterwards.
The unit prices and standing charges are therefore more useful than the single headline number when comparing what individual households may actually pay.
The £1,723 figure is a modelled annual cost at defined consumption levels. It is not a guaranteed bill and it is not directly comparable with every historical cap figure unless the underlying consumption assumptions are also considered.
The VAT reduction applies to fixed tariffs too
Households that previously moved to a fixed energy tariff occupy another category.
The October price-cap increase does not alter the price agreed in an existing fixed-rate contract. Ofgem estimates that around 35 per cent of households are currently on fixed tariffs.
But the removal of electricity VAT applies independently of the price cap.
The Government says suppliers should therefore remove VAT from qualifying domestic electricity even where the customer has already fixed the underlying tariff.
That means a household on a fixed tariff can receive a reduction in the tax charged on electricity without being exposed to October’s increase in capped standard-variable gas and electricity rates.
The tax cut lasts six months
The zero rate is temporary.
The legislation applies to qualifying supplies made between 1 October 2026 and 31 March 2027.
Unless the law is changed again, the special zero rate therefore expires at the end of March.
The Government announced the measure in July as an immediate cost-of-living intervention. It estimated that the reduction would cost approximately £850 million during the 2026–27 financial year.
It also made an unusual connection between the tax measure and another area of government policy: ministers said the electricity VAT reduction for this financial year was being funded from money released by cancelling the UK Government’s proposed £1.8 billion digital identity programme.
How the VAT cut is being paid for
The UK Government says the temporary cut in VAT on domestic electricity will cost about £850 million in 2026–27. It says that cost is being met from savings created by cancelling a separate £1.8 billion Digital ID programme that had been planned over three years.
This does not mean money from a dedicated digital-ID account has simply been transferred to household energy bills. The Government says the £1.8 billion programme would itself have required savings to be found elsewhere in existing departmental budgets. After the programme was cancelled, those planned savings were instead redirected towards the electricity VAT reduction.
The funding decision does not affect the way the VAT cut works. From 1 October 2026 until 31 March 2027, qualifying domestic electricity in Scotland, England and Wales is charged VAT at zero rather than 5 per cent. Other domestic fuels, including gas, remain subject to the existing 5 per cent rate.
For households, there is nothing to apply for. Suppliers are expected to remove the VAT automatically from qualifying electricity bills, including fixed tariffs.
What changes on the bill tomorrow
From 1 October, qualifying electricity should be billed without VAT. Gas will continue to include 5 per cent VAT. Customers on standard variable tariffs will also move on to the new Ofgem cap rates for their region and payment method.
On the Great Britain direct-debit averages published by Ofgem, electricity will cost 26.32 pence per kilowatt hour with a 54.83 pence daily standing charge. Gas will cost 7.97 pence per kilowatt hour with a 29.68 pence daily standing charge.
The figures individual Scottish households see may differ because the cap varies by electricity and gas region, payment type and meter arrangement.
The direction of the change, however, is clear.
The tax on domestic electricity is disappearing for six months. It has prevented a larger increase in the overall cap, but it has not been enough to make the representative dual-fuel bill fall.
From tomorrow, electricity becomes tax-free while the cost of a typical gas-and-electricity household under Ofgem’s cap still rises.
Sources
Energy price cap will rise by 4% from October 2026 — Ofgem, 26 August 2026.
https://www.ofgem.gov.uk/press-release/energy-price-cap-will-rise-4-october-2026
Energy price cap unit rates and standing charges — Ofgem, rates for 1 October to 31 December 2026.
https://www.ofgem.gov.uk/your-energy-supply/your-energy-bill/energy-price-cap-unit-rates-and-standing-charges
The Value Added Tax (Supplies of Domestic Electricity) Order 2026 — UK Statutory Instrument 2026 No. 987, made 7 September 2026.
https://www.legislation.gov.uk/uksi/2026/987/made
Temporary zero rate of VAT for domestic electricity in Great Britain — HM Revenue & Customs, 8 September 2026.
https://www.gov.uk/government/publications/temporary-zero-rate-of-vat-for-domestic-electricity-in-great-britain
Fuel and power (VAT Notice 701/19) — HM Revenue & Customs, updated 8 September 2026.
https://www.gov.uk/guidance/vat-on-fuel-and-power-notice-70119
Breathing space on your energy bill — Department for Energy Security and Net Zero, 26 August 2026.
https://www.gov.uk/government/news/breathing-space-on-your-energy-bill
New PM cuts tax on household electricity bills to give breathing space on cost of living — Prime Minister’s Office, HM Treasury and Department for Energy Security and Net Zero, 21 July 2026.
https://www.gov.uk/government/news/new-pm-cuts-tax-on-household-electricity-bills-to-give-breathing-space-on-cost-of-living
