VAT scrapped on electricity bills: What it means for heat pumps

Key takeaways

• From 1 October, the government will remove VAT from household electricity bills, cutting the rate from 5% to 0%.
• The average household is expected to save around £45 a year.
• Because heat pumps run on electricity, they'll become even cheaper to run.
• It's another step towards making electric heating more affordable than fossil fuel heating.

VAT is being scrapped on electricity bills. That's good news for everyone. But especially if you have a heat pump.

From 1 October, households across England, Scotland and Wales will no longer pay VAT on their electricity bills. The government says the change will save the average household around £45 a year – a welcome bit of breathing space after several years of volatile energy prices and rising household bills.

If you're considering a heat pump, though, this announcement means something more than a slightly lower electricity bill. Because unlike a gas boiler, a heat pump runs on electricity. It also gets most of its heat from the outside air. So when electricity becomes cheaper, the cost of heating your home comes down too.

It's another sign that the economics of clean heating are moving in the right direction.

Why does removing VAT make heat pumps cheaper to run?

A heat pump works very differently to a boiler. Instead of burning gas to create heat, it transfers heat that's already in the outside air into your home using a relatively small amount of electricity. That's why modern heat pumps (like the Aira Heat Pump) can deliver four units of heat for every unit of electricity they use.

For years, high electricity prices have been one of the biggest barriers to switching to a heat pump in the UK. Even though heat pumps are far more efficient than gas boilers, electricity has traditionally been relatively expensive compared with gas, making the savings less obvious than they are in many other European countries – like Sweden, where we're from.

Removing VAT won't suddenly change that overnight. But it is another step towards closing what's known as the spark gap – the difference between the price of gas and electricity. As electricity becomes more affordable, the cost of running a heat pump falls too, making electric heating an increasingly attractive alternative to a gas boiler.

The VAT change isn't the only thing helping to close the spark gap. The UK government has also announced plans to reduce the link between electricity prices and the cost of gas, helping electricity better reflect the growing share of renewable energy on the grid. You can learn more about the spark gap, why it exists and what's being done to close it in our article, "Why are electricity prices linked to gas in the UK?"

So what does that actually look like?

Let's use a simple example.

At the time of writing this, our current heat pump savings are calculated using Ofgem's electricity price cap of 26.11p per kWh, which includes 5% VAT. Remove that VAT and the price falls to around 24.87p per kWh.

For a home using around 4,000 kWh of electricity a year, that's roughly £50 less spent on electricity over the course of a year – without changing how you heat your home, turning the thermostat down or making your house more efficient. Electricity simply becomes cheaper.

Every home is different, of course, and so are the savings. But the principle stays the same: when the cost of electricity falls, so does the cost of running a heat pump.

Thinking about switching to a heat pump?

Every home is different, and so are the savings. That's why every Aira journey starts with a free, no-obligation home energy assessment.

We'll show you how a heat pump would perform in your home, what your running costs could look like, and how much you could save.

No guesswork. Just straightforward advice. Simply answer a few questions about your home below to get started.