Prime Minister Andy Burnham announced on July 21, 2026, that VAT would be removed from domestic electricity bills from October 1, reportedly for one year. The measure was presented as a cost-of-living move, but one detail in the electricity VAT announcement can look puzzling at first: removing a 5% tax reduces a VAT-inclusive electricity charge by about 4.76%, not a full 5%.
That is not a hidden deduction or a quirk of energy billing. It is simply the result of measuring the tax and the saving against two different totals. VAT is added to the price before tax, while the percentage reduction is measured against the larger price after tax.
The £100 calculation
Start with an electricity charge of £100 before VAT. At a 5% VAT rate, the tax is £5, so the amount shown to the customer becomes £105.
If VAT is then removed, the total goes from £105 back to £100. The customer saves £5. But that £5 saving is being compared with the £105 amount the customer was previously paying:
£5 ÷ £105 × 100 = 4.7619%
Rounded to two decimal places, the reduction is 4.76%.
The common mistake is to take the VAT-inclusive price and subtract 5% from it. On a £105 charge, that would mean calculating £105 × 0.95, which gives £99.75. That removes £5.25—even though only £5 of VAT was originally added.
The correct way to strip 5% VAT from an inclusive amount is to divide by 1.05. In this example:
£105 ÷ 1.05 = £100
Dividing the inclusive price by 1.05 follows the government’s standard VAT calculation for recovering the net amount from a gross total. The calculation works the same way whether the original VAT-inclusive electricity charge is £10.50, £105 or £1,050.
Why 5% in one direction becomes 4.76% in the other
The apparent mismatch comes from the denominator—the number used as the base for the percentage.
When 5% VAT is added, the base is the £100 pre-tax amount. The £5 tax is exactly 5% of £100. When the VAT is removed, however, the starting point is the £105 VAT-inclusive amount. The same £5 is only 4.7619% of £105.
Percentage increases and percentage decreases are therefore not automatically symmetrical. A 5% increase takes 100 to 105, but a 5% decrease takes 105 to 99.75. Returning from 105 to 100 requires a reduction of approximately 4.76%.
This is also why saying that the VAT “makes up 5% of the final bill” is imprecise. At a 5% VAT rate, VAT equals 5% of the pre-tax charge, but it equals 5/105—or about 4.76%—of the VAT-inclusive charge.
What the change means for capped electricity rates
The same arithmetic can be applied to published unit rates and standing charges when those figures already include VAT. For July through September 2026, the electricity price-cap figures are 26.11p per kilowatt-hour and 57.19p per day for the standing charge. Both figures include 5% VAT.
To find the VAT-free equivalents, divide each inclusive figure by 1.05. That produces approximately 24.87p per kWh and 54.47p per day. The differences—about 1.24p per kWh and 2.72p per day—are 4.76% of the published inclusive figures, subject to rounding.
Those calculations illustrate the tax effect on the stated rates. They do not establish what every household will pay from October. The quoted cap covers the July–September period, while the announced VAT change is due to begin on October 1. Rates can also vary by region, meter and tariff.
Why the whole bill may not fall by exactly 4.76%
For a charge that consists entirely of domestic electricity priced with 5% VAT, removing that VAT reverses the tax and reduces the inclusive amount by roughly 4.76%. A real household statement, however, may contain more than a simple electricity subtotal.
The cash saving depends on how much electricity the household uses, as well as its applicable unit rate and standing charge. A larger electricity charge contains more VAT in pounds and pence than a smaller one, even though the percentage relationship is the same.
The announcement is specifically about domestic electricity. It should not be described as a 4.76% guaranteed reduction in a household’s entire dual-fuel bill, because that bill may also contain gas charges. Nor does the announcement establish the same treatment for business supplies or public electric-vehicle charging. Different goods, services and supply categories can carry different VAT rates, so the precise category and supply matter.
The relevant starting point is the established reduced rate for qualifying domestic energy. Before the new announcement, qualifying domestic energy carried a reduced VAT rate of 5%. Removing it means reversing the VAT already included in the electricity charge, not applying an additional 5% discount to the gross total.
The reusable rule
For any price that includes 5% VAT, divide the displayed amount by 1.05 to find the VAT-free price; the saving is the displayed amount minus that result, or about 4.76% of the VAT-inclusive total.
