Rishi Sunak may slash VAT on energy bills – but how much will this save you?

Energy crisis: Red Wall MPs may feel ‘betrayed’

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Chancellor Rishi Sunak could curb energy bills in his next Budget on October 27. Rumours have been growing that Mr Sunak might reduce the five percent VAT rate on household energy bills to relieve pressure on struggling families amid rising living costs. Just how much could you save?

Energy bills have been growing at an eye-watering rate, as wholesale prices for natural gas have spiked globally.

This has lead to a number of smaller suppliers going bust, such as Green, Pure Planet and Colorado Energy.

The Government has been forced to increase the price cap on energy bills to manage these rising costs and to prevent the collapse of more suppliers.

The new energy price cap set by Ofgem will see typical bills rise by £139 a year, and for customers who use prepayment meters, this will increase by £153.

Ofgem has warned these bills will likely rise again next April unless the Government steps in.

But now that the UK is free from Brussels, the Government can set their own VAT rates.

Previously these were set centrally within the European Union (EU), and all EU member states were obliged to follow them.

Mr Sunak is rumoured to be considering reducing the five percent VAT rate in his next Budget.

Treasury officials who have been briefed on the next Budget told the Financial Times that slashing VAT was being considered, but nothing final has been decided yet.

Although the move would help many families struggling with increased household bills this winter, it would cost an estimated £1.5billion a year.

Mr Sunak has previously said the Government must curb its spending to help Britain bounce back after the pandemic, so any costly policies may be off the table for now.

The decision to cut VAT could be a political minefield for the PM ahead of the COP26 summit.

Prime Minister, Boris Johnson, is expected to plead with world leaders to ramp up progress towards Net-Zero.

But cutting VAT on energy bills could be seen to go against this messaging.

Paul Johnson, director of the Institute for Fiscal Studies old told the Financial Times that cutting VAT would “increase the effective subsidy we provide for burning gas”.

However, the PM may have no choice but to cut VAT on energy bills, as he is facing growing pressure from Tory MPs to take steps to avoid a cost-of-living crisis.

MP David Morris said the UK could be heading towards a “winter of discontent” unless the Government takes steps to address spiralling living costs.

Poverty campaigners have also called on the PM to take action to prevent families from falling into poverty this winter due to increased household bills.

The think-tank, Resolution Foundation, has called for “more targeted support” for low-income families this winter.

Despite these calls for change, it’s unlikely that we will know about any cuts to VAT until Mr Sunak’s Budget is published on October 27.

A spokesperson for the Department of Business, Energy, and Industrial Strategy has said: “We do not comment on speculation around tax changes outside of Budget.”

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