What Does the Electricity VAT Cut Mean for UK Businesses?
Prime Minister Andy Burnham has announced that VAT will be removed from qualifying domestic and business electricity bills from 1 October 2026 for the remainder of the 2026–27 financial year.
The temporary measure is intended to reduce electricity costs during the winter. Eligible businesses include small businesses that qualify for domestic energy VAT relief and aren’t registered for VAT, as well as qualifying charities and residential care homes. Gas bills aren’t included in the VAT removal.
For most businesses, the announcement doesn’t change the wider pressures affecting commercial electricity and gas prices. Wholesale market movements, contract terms and the timing of your renewal will continue to have a much greater effect on what you pay.
What has the government announced and who qualifies for the electricity VAT cut?
From 1 October 2026, the VAT rate applied to qualifying electricity bills will be temporarily reduced from 5% to 0%.
The measure will remain in place until 31 March 2027. It will apply automatically, so eligible commercial and domestic customers shouldn’t need to contact their supplier or change tariff.
The government has introduced the temporary reduction to give non-VAT registered small business owners, charities, residential care homes and households additional support with their electricity bills over the winter.
However, it’s important to be clear about what the measure covers. The VAT removal only applies to electricity supplied to qualifying commercial and domestic customers. It isn’t a general reduction in the underlying price of energy.
Does the VAT cut apply to both gas and electricity?
The VAT cut only applies to qualifying electricity bills.
Businesses and households with a dual-fuel tariff will therefore only receive the VAT reduction on the electricity they use. VAT will continue to be added to the gas element of their bill.
This means the announcement shouldn’t be interpreted as the removal of VAT from all energy costs. The reduction is limited to one fuel and will only apply during the six-month period set by the government.
Businesses and households that use more electricity may see a larger cash saving than those that rely mainly on gas. However, the amount saved will still depend on actual electricity consumption and tariff rates.
Will the VAT cut reduce wholesale electricity prices?
Removing VAT from eligible electricity bills won’t directly change wholesale energy prices.
Wholesale prices are the prices suppliers pay when purchasing electricity and gas before selling energy to their customers. These costs are influenced by supply, demand, generation levels, fuel availability and international market conditions.
VAT is added later as part of the final bill. Removing it reduces one element of the amount paid by an eligible customer, but it doesn’t change the price suppliers pay to obtain the energy.
Wholesale and network costs remain among the largest components of energy bills. Ofgem has also reported that wholesale prices remain above pre-crisis levels despite falling from their 2022 peaks.
The VAT decision therefore offers targeted tax relief rather than a reduction in the underlying cost of generating, purchasing or transporting electricity.
Why could wholesale energy prices remain high and uncertain?
The UK energy market is closely connected to international gas and electricity markets. Events outside the UK can therefore affect the prices available to both suppliers and businesses.
The continuing conflict in Ukraine remains one source of uncertainty. European countries have changed how and where they obtain energy since Russia’s invasion, increasing competition for alternative gas supplies and liquefied natural gas.
Conflict in the Middle East is also creating further volatility. Concerns about gas supplies, oil production and international shipping routes are causing wholesale prices to move quickly, even before any physical disruption takes place.
Ofgem reported that increases in wholesale prices during 2026 were mainly connected to higher gas prices and continued volatility caused by events in the Middle East. Its price cap analysis also identified the conflict as a primary driver of recent wholesale market movements, particularly because of concerns surrounding liquefied natural gas supplies.
Weather, storage levels and electricity demand can create additional pressure. A colder winter can increase demand for heating, while lower wind generation may increase reliance on gas-fired power stations.
These external factors mean wholesale prices can remain uncertain even when the government changes taxes or other costs applied to commercial and domestic bills.
How does the electricity VAT cut apply to businesses?
The temporary VAT removal has been announced as a temporary measure which should see VAT automatically removed from non VAT registered small businesses, charities and residential care homes.
The announcement won’t:
- Reduce the agreed unit rate in an existing business energy contract
- Change a business’s contract end date
- Remove standing charges
- Protect businesses against wholesale market movements
- Prevent out-of-contract or deemed rates from applying
- Reduce the cost of commercial gas use
A deemed rate is the price a supplier charges when a business uses energy without having agreed a current contract with that supplier. These rates are generally more expensive than negotiated fixed-term contracts.
Some organisations may qualify for reduced VAT treatment under existing rules because of the way energy is used. However, this is separate from the newly announced electricity VAT cut.
Why business energy bills could remain under pressure
Commercial energy bills are affected by several different costs. VAT is only one part of the overall amount a business pays.
The unit rate is usually one of the most significant elements. This is the amount charged for every kilowatt hour, or kWh, of electricity or gas used.
Businesses also need to consider standing charges, which are fixed daily costs applied regardless of how much energy is consumed.
Other factors can include:
- Wholesale electricity and gas prices
- Network and distribution charges
- Metering costs
- Government policy costs
- Supplier operating costs
- The length and type of the contract
- The business’s consumption profile
- Payment terms and credit history
The date on which a contract is agreed can also make a substantial difference. Suppliers purchase energy in advance, so the rates available to businesses can reflect wholesale market conditions at the time a quotation is produced.
A company that agrees a contract during a temporary market increase may secure a higher rate than one that reviews the market under more favourable conditions.
Similarly, a business that allows its contract to expire without arranging a replacement could be placed on expensive out-of-contract pricing.
How can businesses keep their energy costs under control?
Businesses can’t control geopolitical events or wholesale markets. However, they can take practical steps to manage how and when they purchase energy.
Review your current contract
Start by establishing exactly what you’re currently paying and when your agreement ends.
Your review should include:
- The electricity and gas unit rates
- Daily standing charges
- The contract start and end dates
- Any notice requirements
- Your annual consumption
- The number of meters and sites covered
- Whether the contract renews automatically
- Any early termination conditions
This information will help you understand your current position and identify when alternative contracts can be considered.
Start before your renewal date
Leaving an energy review until the contract is about to expire can restrict your options.
Business energy contracts can often be arranged in advance, with the new agreement starting when the existing contract ends. This gives you more time to compare rates without interrupting your supply.
An early review also reduces the risk of falling onto deemed or out-of-contract rates.
The right time to enter a new contract will depend on market conditions, your current end date and how much price certainty your business needs. It’s generally better to monitor the market over time than to rely on a quotation obtained on one day.
Compare the full contract
A lower unit rate doesn’t always mean a lower overall bill.
For example, one contract may offer a competitive electricity rate but include a higher daily standing charge. Another could have more restrictive payment terms or contract conditions.
A like-for-like comparison should consider:
- Unit rates
- Standing charges
- Contract length
- Fixed and variable charges
- Payment terms
- Supplier conditions
- Consumption assumptions
- Any additional costs
This gives you a more accurate understanding of what each contract could cost your business.
Monitor your energy use
Reducing avoidable consumption can help control bills regardless of the contract you’re on.
Regular meter readings can also help prevent estimated bills and make it easier to identify unusual increases in usage.
Practical measures may include:
- Switching off equipment when it isn’t needed
- Reviewing heating and cooling schedules
- Maintaining energy-intensive equipment
- Monitoring usage outside normal operating hours
- Checking for unexpected changes in meter data
- Reviewing consumption across individual sites
- Replacing inefficient lighting or equipment when appropriate
The most useful measures will depend on how, when and where your business uses energy.
Why timing matters when arranging a business energy contract
Wholesale markets move daily. The contract rate available today may therefore be different from the rate offered next week or next month.
This doesn’t mean a business should try to predict the lowest possible point in the market. Waiting indefinitely for prices to fall can create its own risks, particularly when a contract end date is approaching.
Instead, businesses should assess the available rates alongside their budget, energy use and attitude towards price risk.
Fixing a contract can provide greater cost certainty because the agreed energy rate remains in place for the contract term. However, a longer agreement may also mean remaining tied to that rate if the market later falls.
Shorter contracts provide an earlier opportunity to review the market again, but they can expose the business to more frequent price changes.
There’s no single contract length or purchasing strategy that suits every organisation. The appropriate approach will depend on the business’s operational and financial priorities.
How Business Utility Hub can help
If you are unsure whether your small business will benefit from the VAT cut or would like to reduce your overall energy costs, Business Utility Hub can help.
Business Utility Hub monitors the business gas and electricity markets every day. This allows us to track market movements and compare the contracts available through our trusted supplier panel.
We work with large and small businesses across a wide range of sectors, including care, hospitality, education and manufacturing. Each sector has different energy requirements, from round-the-clock usage in care settings and hotels to high-consumption machinery in manufacturing and multiple-site requirements across schools or education groups.
We’ll review your existing agreement, consumption profile and renewal date before explaining the available options in plain English. This includes unit rates, standing charges, contract terms and any other costs that may affect your bill.
By taking your sector, operating hours and energy use into account, we can help identify a contract that is better suited to the way your organisation runs.
Our specialists can:
- Compare suitable business electricity and gas contracts
- Explain the differences between supplier offers
- Review contract rates and standing charges
- Identify potential renewal and out-of-contract risks
- Help you select an appropriate contract term
- Manage the full switch to your new supplier
- Provide support throughout your contract
You’ll also have a dedicated account manager, so you’ll know who to contact when you need help. We answer calls within three rings and provide clear information about our service and fees, without hidden costs.
Get prepared before your renewal date
The temporary electricity VAT cut may provide temporary relief for, but it won’t resolve the wider factors affecting business energy prices. Reviewing your contract early and comparing the market can help you make a more informed decision.
Call Business Utility Hub on 0800 781 2700 or email savings@businessutilityhub.co.uk to discuss your current business energy contract.
