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What this article covers: the two cost of living measures announced on 21 and 22 July 2026, the cut in VAT on domestic electricity from 5% to 0% from 1 October, and the £2 cap on single bus fares in England outside London from 1 January 2027. What each one is worth to a typical household, who is excluded, how they are funded, and what was trailed but not announced.
What it does not cover: a political verdict on the new government, or predictions about policies that have not been announced. Figures and mechanics only.
Two days into the new government, two cost of living measures have landed. The first, announced on 21 July, is an electricity VAT cut for households: from 5% to 0% for six months from 1 October 2026. The second, announced on 22 July, caps single bus fares in England outside London at £2 for the whole of 2027, a third off the current £3 cap.
The headline numbers are £45 a year off the energy price cap and a third off bus fares. The honest numbers are a little smaller. That difference matters if you’re budgeting around them, so this piece sets out both, using the government’s own figures, Ofgem’s cap data, and the independent analysis published since.
The backdrop: inflation cooled to 2.6% in June (from 2.8% in May, the lowest since March 2025), but the July energy price cap rose 13%, and the Bank of England decides rates again on Thursday 30 July. Cheaper bills and cooler inflation are pulling one way; energy costs and the oil market are pulling the other.
In short
- VAT on domestic electricity drops from 5% to 0% from 1 October 2026, for six months. Gas stays at 5%.
- The government says that’s worth about £45 a year off the October price cap. Martin Lewis’s analysis puts the realistic net saving nearer £20 over the six months, because the cap itself moves at the same time.
- Single bus fares in England outside London are capped at £2 from 1 January to 31 December 2027, down from £3. London, Scotland, Wales and Northern Ireland have their own arrangements.
- Northern Ireland cannot apply the VAT cut directly (EU rules under the Windsor Framework); reports point to an automatic £30 a year off electricity bills for three years instead.
- Rent controls were trailed but haven’t been announced. The Winter Fuel Payment is unchanged. No Budget date has been set.
- Funding is contested: the VAT cut costs about £850m this year, assigned to the cancelled digital ID scheme, and the Institute for Fiscal Studies has questioned whether that covers it.
How the electricity VAT cut works from 1 October
Domestic energy in the UK carries VAT at the reduced rate of 5%, applied automatically to household supplies of both gas and electricity. You don’t claim it; it’s built into the unit rates and standing charges on your bill.
From 1 October 2026, the rate on electricity only falls to 0%. The cut runs for six months, to the end of March 2027. Gas keeps its 5% rate throughout. That split matters: for a typical dual fuel household most winter spending goes on gas heating, so the fuel getting the tax cut isn’t the fuel doing the heavy lifting in the cold months.
There’s nothing for you to do here. Suppliers apply VAT at the rate in force, so the change flows through your bill automatically, whether you’re on a price-capped standard variable tariff or a fix. The government estimates the cut will shave around 0.10 percentage points off CPI inflation and 0.14 off RPI.
The £45 headline, and the £20 reality
The government’s figure is that the cut takes “around £45 off the yearly Ofgem price cap in October”, about £3.75 a month. Two things before that number goes in your budget.
First, it’s an annualised figure, measured against the October cap level. The policy itself runs for six months. If the October rate simply held, the cash you’d actually keep across October to March is roughly half the headline, nearer £22.
Second, the cap doesn’t hold still. Ofgem resets it every three months from wholesale costs, and those move for reasons that have nothing to do with tax. Martin Lewis ran this arithmetic the day the cut was announced: with the October cap expected to rise for wholesale reasons at the same time as VAT comes off, his estimate of the actual saving over the six months came out at about £20. In his words: “So you’ve got £45 coming off bills, but £25 going onto bills. So on 1 October, it’s looking like the actual saving over six months would be £20.”
None of that makes the cut worthless. It does mean the right way to read it is “your October bill will rise by less than it otherwise would”, not “your bill falls by £45”.
What happens to the October 2026 energy price cap
The current cap, for July to September 2026, rose 13% on the previous quarter. On Ofgem’s updated typical-use benchmark that’s £1,663 a year for a typical dual fuel household paying by direct debit; on the older 2023 benchmark that many guides still quote, the same cap works out at £1,862. Both are Ofgem’s own figures; they just assume different typical consumption. Whenever you see a “typical bill” number, check which basis it’s on before comparing.
Ofgem publishes the October to December cap by 26 August 2026. The first forecast to include the VAT cut came from Cornwall Insight on 21 July: about £1,700 a year on the updated basis, which is still a rise on the current £1,663 even with the tax cut included. Their pre-cut forecast had been £1,654 on the same basis, which is the £45 gap showing up exactly where the government said it would. E.ON Next’s published prediction of £1,747 was last updated on 20 July, the day before the VAT announcement, so treat it as a pre-cut figure until it’s refreshed.
For the mechanics of how the cap itself works, unit rates, standing charges and whether to fix, see our July 2026 energy price cap guide, which has been updated for the VAT change.
Northern Ireland is different
The VAT cut applies in Great Britain but not directly in Northern Ireland. Under the Windsor Framework, Northern Ireland follows EU VAT rules for goods, and electricity needs EU agreement before the rate can be changed there. The government has said the Northern Ireland Executive “will receive comparable funding” so households aren’t left out, and reporting in the Irish News puts the concrete form of that at an automatic £30 a year off electricity bills for three years from September, backed by £81 million from the Treasury. That detail comes from press reporting rather than a published government document, so treat the exact figures as provisional until confirmed.
The £2 bus fare cap
From 1 January 2027, single bus fares on participating routes in England outside London are capped at £2, for the whole of 2027. The current cap is £3 and had been due to run to the end of March 2027, so this cuts fares by a third and extends the scheme by nine months in one move. London is excluded because its fares are already capped locally by the Mayor; Scotland, Wales and Northern Ireland receive funding through the Barnett formula to spend on their own schemes.
Some history, because this cap has bounced around: a national £2 cap first ran from January 2023 as a cost of living measure, was raised to £3 from January 2025, and now comes back down to £2. If you commute by bus outside London, the practical arithmetic is simple: a five-day return commuter currently paying £6 a day at the cap would pay £4 from January, about £10 a week less, or roughly £500 over the year the cap runs.
The package is costed at £454 million, including the devolved funding, with about £400 million found by switching international climate finance from grants to loans and the rest from energy department budget savings; total scheme cost tops £500 million once existing Department for Transport bus funding is counted in.
What was trailed but not announced
Rent controls. Asked directly about rent freezes alongside energy and bus fares, the Prime Minister said “We’re looking at measures that could make a difference this year” and that it was premature to say which. As of 22 July, no rent control policy, mechanism or date exists. If you’re a renter or a landlord, there’s nothing to act on yet, and any specifics you see are speculation.
The Winter Fuel Payment is unchanged. For winter 2026/27 it stays at £200 for those born between 28 September 1946 and 27 June 1960 and £300 for those born before 28 September 1946, paid automatically in November or December, and clawed back through the tax system if your total income is over £35,000 (your partner’s income doesn’t count).
No Budget date. The new Chancellor, John Healey, has kept the existing fiscal rules and repeated that “fiscal control is the first duty of any Chancellor”, but no date has been set for a Budget or autumn statement. Until one lands, tax, ISA and pension policy for 2027/28 is unwritten.
How it’s paid for, and the catch
The VAT cut costs the Exchequer about £850 million in 2026/27. The Chancellor’s line is that “this measure is funded this year from cancelling the Digital ID programme”. The catch, raised by the Institute for Fiscal Studies rather than by political opponents, is arithmetic: the digital ID scheme was costed at about £600 million a year over three years, which leaves the first year around £250 million short of the VAT cut’s cost. The IFS’s Helen Miller put it this way: “Government think they have found funding for this year, but only by reallocating savings that haven’t yet been made.”
Why that matters to savers and borrowers rather than just to Westminster: the gilt market is currently pricing UK fiscal credibility hard. The 10-year gilt yield closed 21 July at its highest since May, and the 30-year at a two-month high, and gilt yields feed mortgage pricing and annuity rates. Small unfunded measures don’t move that on their own, but a pattern of them would. Our guides to gilt yields and your money and the record cost of servicing government debt cover the mechanics.
FAQ
Does the VAT cut apply to gas?
No. Only electricity moves to 0%. Domestic gas stays at the 5% reduced rate throughout the six months.
Do I need to do anything to get it?
No. VAT is applied by your supplier at the rate in force, so the change appears on bills automatically from 1 October 2026. It applies whether you pay by direct debit, prepayment or on receipt of bill.
I’m on a fixed tariff. Do I still benefit?
Yes. VAT applies to all domestic electricity supply, fixed or variable. Your fix sets the pre-tax unit rates and standing charge; the VAT layer on top falls to zero for the six months like everyone else’s.
Does the £2 bus cap apply in London, Scotland or Wales?
No. It covers participating operators in England outside London. London sets its own fares, and Scotland, Wales and Northern Ireland receive equivalent funding through the Barnett formula for their own transport schemes.
Will the October 2026 price cap fall because of the VAT cut?
Probably not. The first post-announcement forecast (Cornwall Insight, 21 July) still points to a small rise, to about £1,700 on Ofgem’s updated typical-use basis, because wholesale costs are pushing up at the same time as the tax comes off. The cut makes October smaller than it would have been, not smaller than July. Ofgem confirms the actual figure by 26 August.
Savvy Investor’s take
Judge both measures by their honest size, not their headlines. The electricity VAT cut is worth about £20 to £22 to a typical household over its six-month life on the independent arithmetic, and the bus cap is worth real money only if you actually ride buses outside London, where it could save a daily commuter several hundred pounds over 2027. Neither changes the bigger picture for your money. The July cap rise of 13% dwarfs the VAT saving, the October cap is still likely to edge up, and the interest rate story is being written by oil prices and the gilt market, not by these announcements. Budget for the £20, enjoy the £45 headline if it turns out better, and treat anything on rent controls as unwritten until it’s announced.
Information, not advice. This article explains announced government policy and published figures as at 22 July 2026. Policy detail can change before and after implementation. Nothing here is a recommendation to buy, sell, fix, switch or make any financial decision. For decisions about your own circumstances, speak to a qualified, FCA-authorised financial adviser.
Key sources
- GOV.UK: New PM cuts tax on household electricity bills (21 July 2026)
- GOV.UK: Cheaper travel for millions with a third off fares (22 July 2026)
- ONS: Consumer price inflation, UK: June 2026
- Ofgem: Changes to the energy price cap, 1 July to 30 September 2026
- Cornwall Insight: October cap forecast updated after the VAT reduction (21 July 2026)
- MoneySavingExpert: Martin Lewis on what the VAT cut actually saves (21 July 2026)
- GOV.UK: Winter Fuel Payment