How much VAT is charged on energy bills?

That is the short answer, and it holds whether the bill is paid by direct debit, on receipt of a paper bill, or through a prepayment meter. The rate is set by the use of the property, not by the tariff or the payment method. Business energy is a different matter: commercial users pay the standard 20% rate³.

The picture changes from 1 October 2026. The government announced in July 2026 that VAT on domestic electricity bills would be removed, taking the rate from 5% to 0%, funded from the cancelled Digital ID programme⁵. The cut applies to electricity only, not gas⁶. Gas therefore keeps the 5% reduced rate, and Ofgem's price cap figures for 1 October 2026 to 31 March 2027 still show VAT at 5% on gas⁷.

VAT on domestic energy bills: 5%

The 5% rate is not a temporary concession. VAT was imposed on household energy bills in 1993, and the reduced rate has applied since⁹. It sits below the 20% standard rate that applies to most goods and services, and it applies to gas and electricity for domestic use alike². The Energy Ombudsman's consumer guidance states the position plainly: "VAT: This is currently 5% on energy bills for domestic consumers"¹⁰.

The rate is tied to the property, not the person. A landlord recharging energy to a tenant is dealing with a domestic supply, and Citizens Advice notes that the VAT owed on that energy is 5%¹¹. A home used partly for business, or a supply to commercial premises, moves to the standard rate. The Centre for Sustainable Energy sets out the check a household can make: "If the VAT rate on your bill is higher than this, then you are being charged a commercial rate and should contact your supplier immediately"².

The same reduced-rate logic runs through related policy. Certain energy-saving materials installed in homes qualify for 5% or 0% VAT¹², and a reduced rate of 5% applies to the installation of qualifying materials in residential accommodation¹³. Where the value of those materials exceeds 60% of the installation cost, only the labour element qualifies for the reduced rate and the materials themselves are standard rated¹⁴. That is a separate relief from the energy bill rate, but it comes from the same part of the VAT system.

For a household's energy independence, VAT is a cost the household cannot avoid by changing supplier, tariff or payment method. It is levied on the supply itself, so self-generated electricity used at home is not a VAT question at all, while imported electricity and gas remain subject to the rate until the October 2026 change takes effect for electricity.

How much VAT adds up to: around £100 a year

Independent analysis puts VAT on domestic energy at around £75 a year on a typical dual fuel bill⁴. That figure is an average across gas and electricity, and it scales with consumption: a household using more energy pays more VAT, because the tax is a percentage of a larger bill.

To see the scale, the average annual energy bill stands at £1,326⁸. VAT at 5% is a modest share of that, but it is not the only levy on a bill. Policy costs and levies fund schemes including the Warm Home Discount, the Energy Company Obligation and the EU Emissions Trading Scheme, and independent analysis has put around £120 on each consumer's annual bill for those¹⁵. VAT sits alongside those costs rather than replacing them.

The removal of VAT from electricity from October 2026 is estimated to cost around £850 million in 2026-27, on the basis of estimated electricity prices⁵. That gives a sense of the aggregate saving across all households, though the amount any one household sees depends on its electricity use. Because the cut applies to electricity only, a household with high gas use for heating will see a smaller proportional reduction than one with high electricity use.

Businesses pay the standard 20% rate

Commercial energy users pay VAT at the standard 20% rate, not the reduced 5%³. That single difference is the main reason a business electricity bill looks structurally different from a domestic one, and it is the first thing to check when a domestic bill appears to carry the wrong rate.

There is a narrow exception. Independent guidance notes that the 20% VAT rate can be discounted to 5% if small businesses limit their energy use³. That is a specific relief rather than a general rule, and it does not apply to ordinary domestic supplies.

Business bills also carry a different cost shape. For small and medium-sized enterprises using 15,000 to 25,000 kWh a year, the standing charge makes up around 5% of the annual business electricity bill¹⁶. That is a smaller share than many domestic users see, because business consumption is typically higher and the unit rate dominates. The VAT treatment, however, is the headline difference: 20% on the whole bill, standing charge included, unless the limited-use relief applies.

For a household, the practical relevance is diagnostic. A domestic bill showing 20% VAT is wrong, and the Centre for Sustainable Energy's guidance is to contact the supplier immediately². A home business run from a domestic property does not automatically convert the supply to commercial rates; the test is the use of the supply, and mixed-use properties can be more complicated than a single headline rate suggests.

Where VAT sits in your bill breakdown

Ofgem lists VAT as one of the components used to calculate a bill, alongside wholesale costs, network costs, operating, debt and industry costs, EBIT, policy costs, the type of energy used, the type of meter installed and how the bill is paid¹⁷. On the bill itself, VAT appears as a separate line, which is why the rate is easy to check.

The VAT applies to the whole domestic charge, not just the unit rate. That means the standing charge is taxed too. Ofgem's published standing charge for 1 July to 30 September 2026 is 57.19 pence per day, about £200 per year, quoted as including VAT for a standard variable tariff paid by direct debit in England, Scotland and Wales¹⁸. A no standing charge tariff does not escape VAT; it moves cost into higher unit rates, which are also taxed, and independent guidance notes those tariffs typically charge higher unit rates that could result in higher energy bills¹⁹.

The price cap does not change any of this. Ofgem's cap figures include 5% VAT²⁰, and the cap limits unit rates and standing charges rather than the total bill²¹. It does not cover fixed tariffs, business energy contracts, heat networks or heating oil⁷. A household on a fixed tariff still pays 5% VAT on gas and electricity, and from October 2026 will pay 0% on electricity, because the rate follows the supply rather than the cap.

Removing VAT from energy bills: what it would change

The proposal to remove VAT from energy bills, currently charged at 5%, has been on the policy agenda for some years²². In July 2026 the Prime Minister announced plans to cut VAT on energy bills to give families breathing space this winter²³, and the measure was confirmed as a removal of VAT on electricity bills from 5% to 0% for domestic electricity, funded from the cancelled Digital ID programme⁵.

The scope matters. The change applies to electricity, not gas⁶, and the removal takes effect from October²⁵. Independent comment described removing 5% VAT on electricity bills from 1 October as something households would welcome⁶. The estimated cost to the Exchequer is around £850 million in 2026-27⁵.

What it changes for a household is the electricity portion of the bill only. Gas heating, cooking and hot water keep the 5% rate, so a home with high gas use sees a smaller proportional reduction than one with high electricity use. The cut does not alter the standing charge structure, the unit rates themselves, or the policy costs and levies that sit alongside VAT on the bill.

The international comparison is worth noting for context. VAT on gas and electricity is the same everywhere except Latvia and Spain, where the rate on electricity is lower²⁶. The UK's move to 0% on electricity would put it outside that common pattern, at least for electricity, while gas remains at the reduced rate.

For energy independence, removing VAT from electricity reduces the cost of every unit a household imports from the grid, but it does nothing to reduce dependence on the grid itself. It is a price intervention, not a sovereignty one: the household still buys its electricity from a supplier, and the saving scales with consumption rather than with any change in how the energy is produced or stored.