PM Burnham Announces VAT Cut on Electricity Bills Amid Cost of Living Crisis

In one of his first moves as Prime Minister, Andy Burnham has announced that VAT will be cut from household electricity bills, as part of his pledge to help with the cost of living.

The policy came a day after Burnham, in his first speech as prime minister, promised to give people more "breathing space" to help with their finances.

The new PM has also said he will be "looking at" the tax-free personal allowance ahead of his first Budget in the autumn.

Cost of living is a key issue for Burnham. Many people, he has previously said, can't go out for a pint on a Friday, can't take the kids out and can't go on holiday owing to the pressure on their finances.

The cost of living has dominated people's lives in recent years, and - to some extent - our politics too. Easing that pressure hasn't been easy.

If Burnham plans more support in the form of transport costs and allowing people to earn more before being taxed, and makes care and somewhere to live more affordable, he'll face tough choices on funding those moves and managing the trade-offs that come with them.

And his new chancellor, John Healey, will be the one who has to deliver any changes, and outline how to pay for them.

A prime minister saying every minute not talking about the cost of living is "a wasted minute". A chancellor saying it is the "number one focus".

However, these words weren't spoken by the incoming PM and chancellor, but by Sir Keir Starmer and former chancellor Rachel Reeves - and only in January this year.

They removed £150 from a typical annual domestic energy bill in April, by cutting some levies and moving others onto taxation.

But, those bills soon went up again, as did the cost of food and mortgages, owing to the impact of the US-Israeli strikes on Iran. Events can have an instant and extreme impact on the best-laid plans.

"A more volatile world is a more expensive world," says Adam French, of the financial information service Moneyfacts.

The government has announced it is cutting VAT on domestic electricity bills from 5% to zero from 1 October, which it says will save a typical household about £45 a year.

Cutting VAT is a relatively basic tool to reduce energy bills, with larger households likely to save more as they use more electricity.

Also the cost of energy is still set primarily by the wholesale cost of gas - something largely beyond a government's control.

Labour's much-debated general election promise to cut household energy bills by £300 by 2030 remains under close scrutiny.

In Downing Street on Monday, Burnham said he would "bring essentials under public control" to make them more affordable.

One option, championed by charities and the regulator, is the introduction of a social tariff. This would offer discounted bills to the most vulnerable, paid through higher bills or taxes from those who are better off.

Burnham says he will "look at" allowing people to earn more before they start paying income tax, shifting the so-called personal allowance.

Speaking on his first day as PM, he admitted that changing it would be "difficult" in the current economic circumstances.

Under existing government policy, income tax and National Insurance thresholds have been frozen until April 2031 in England, Wales and Northern Ireland. That means that as you earn more, a greater proportion of your income is taxed.

That's a big revenue raiser for the government, and partially reversing the policy would mean this money would have to be found from elsewhere, or borrowed. Burnham has also hinted at "asking for a little bit more" in tax from some people.

He will stick to the Labour manifesto of not raising the main three taxes - income tax, National Insurance and VAT. But we've already seen since the election that other taxes can be altered, such as inheritance tax changes affecting family farms, often bringing a vociferous response.

Among the possibilities are:

Replacing stamp duty and council tax with an alternative property tax

Higher rates on capital gains tax, which you pay on the profit when selling assets such as property outside a primary home as well as some shares, to bring them in line with income tax rates

Any such reforms would take time, and bring winners and losers. When Reeves and Starmer tried to make big changes, even with a big majority, numerous U-turns followed, usually forced on him by his own party.

Burnham and Healey are also expected to stick to the government's self-imposed fiscal rules, a set of choices on government tax and spending decisions.

Opinion is divided on whether these are sensible building blocks for the economy which allow living standards to improve, or a "dysfunctional" economic straitjacket.

"The [resulting] rummage down the back of the sofa for loose change has hit personal finances hard, changed the tax landscape, and makes it more challenging for people to save for their future," says Rachel Vahey, head of public policy at investment platform AJ Bell.

Burnham is facing massive decisions about who receives sickness and disability benefits, and how much they get, as well as getting young people into work.

He said he "does not want to leave office" without reforming the social care system - again, a complex and potentially expensive policy which others have tried, and failed, to tackle.

By sticking with the current Labour manifesto, he will also stick with the state pension triple lock, which sees it increase in line with the highest of inflation, average wages or 2.5% every year.

Finally, as with all previous administrations, how a Burnham-led government reacts to events beyond its control may have the biggest impact on the money in people's pockets.