THE new Prime Minister, Andy Burnham, has promised to give people some breathing space through help with the cost of living.

So one of the first things his Labour government has done is to announce the abolition of VAT on domestic electricity bills from October 1, 2026 to March 31, 2027, giving people a little breathing space this winter. The removal of five per cent VAT on electricity will benefit 30-million households in Britain and care homes, some charities and some small businesses will also benefit.

This rapid action ahead of the Budget means that this will be factored into the Ofgem energy cap decision in August which will come into effect from October. Of course this is not the silver bullet to the cost of living crisis but it does show a clear direction of travel. The VAT cut is expected to take around £45 off the yearly Ofgem price cap.

This is a commitment worth £850-million this financial year and is the first immediate step the government will take to bring down the cost of living, funded by the abolition of Digital ID. VAT is currently paid at five per cent on domestic electricity. VAT on energy was introduced by the Conservatives at eight per cent in 1994 then cut to five per cent in Labour’s first Budget in 1997.

All households use electricity so this is an almost universal cut in the cost of living and the first reduction in this tax for almost two decades since the start of the last Labour government. Small businesses who qualify for the domestic energy VAT relief and are not registered for VAT, as well as charities and residential care homes eligible for the reduced rate will also benefit.

All suppliers are expected to pass the VAT reduction on to all customers, including those on fixed tariffs, as they did with the £150 of costs taken off energy bills announced at the last Budget. The poorest households spend the most as a proportion of income, so this measure is progressive when considered in terms of a proportion of income. Focusing on electricity will also bolster our energy security, supporting electrification and reducing our reliance on imported fossil fuels.

The government’s economic approach is based on a simple principle: delivering change while maintaining stability in the public finances. This announcement came after the Prime Minister’s commitment to end rough sleeping and was swiftly followed by a £2 cap on bus fares and a 20 per cent cut in business rates for pubs, clubs and music venues.

There will be more announcements for support with the cost of living crisis over coming weeks and months but the pace with which the new Labour administration has begun to implement changes is encouraging for those of us that have made the cost of living crisis a key priority.

Taken in isolation these changes are small. But as more and more are announced the cumulative effect will be to ease the pressure on hard-pressed household budgets.