Martin Lewis has responded to speculation that the Government may cut VAT on energy bills. At present, a Value Added Tax (VAT) of five per cent is added onto our bills.
Given the current energy price cap for typical use from energy regulator Ofgem of £1,720, a five per cent reduction would mean £86 off each household’s bill. It is important to note that the price cap is increasing by two per cent from 1 October to £1,755 per year, so a five per cent reduction would equate to a £87.75p saving.
It is worth bearing in mind that the larger the bill, the greater the savings would be. The energy price cap is the maximum amount energy suppliers can charge you for each unit of energy and standing charge if you are on a standard variable tariff, and your bill could be higher if you use more.
On Instagram, money-saving expert Mr Lewis stated: “There are rumours the government may get rid of the 5% VAT on energy bills.
“Do you support this move that (would) cut bills by 5% (meaning bigger bills save more ££) or would you prefer the funds from energy VAT to be used to cut the Standing ie Daily Charges (so all save same ££ amount)?”
In 2022, Mr Lewis suggested the cut was something to consider, although he felt it was a ‘blunt tool’ to address high energy bills. Instead, he proposed it might be better to keep it and divert the money it raises to people ‘who will simply be choosing between whether they freeze or they starve – and that’s not an exaggeration in some homes’.
VAT is typically levied at 20 per cent for businesses, though certain exemptions apply. Should the five per cent rate for households be slashed, a 2022 HMRC assessment indicated it would cost the Treasury £1.7billion.
What makes up our energy bills?
The standing charges Mr Lewis mentioned form another component of our energy bills, and they remain contentious. According to Nesta: “The standing charge covers all the fixed costs of providing gas and electricity, such as staff costs and maintaining wires, pipes and cables that deliver energy etc.
“Essentially it is the price for being connected to the grid. Everyone pays a daily electricity standing charge. Those who are on the gas grid also pay a daily standing charge for gas.”
Mr Lewis has consistently campaigned for their reduction, contending that they unjustly penalise lower-income households and those seeking to reduce their consumption. Wholesale expenses – the actual cost of the energy itself – constitute the largest portion of a bill at approximately 36 per cent for electricity and 50 per cent for gas.
There are additionally network expenses for maintaining and upgrading the grid infrastructure. They comprise 24 per cent of an electricity bill and 19 per cent of a gas bill.
The expenses do fluctuate from location to location though to acknowledge the reality that constructing and maintaining these networks proves more costly in certain regions than others. There are also policy costs, which the Government collects to fund environmental investments such as renewable energy.
These also cover social programmes like the Energy Company Obligation scheme, the warm homes discount, and assistance for areas with high electricity distribution costs.
Additionally, there is the EBIT, an extra amount that suppliers earn as profit, along with a headroom allowance and adjustment – small financial buffers in case of unforeseen events such as inclement weather.