Bringing Government energy policies in-house could save the poorest households £110 a year

Moving energy and social policy costs off household electricity bills and onto general taxation would save the poorest fifth of households around £110 a year – net of tax increases to balance the books – with almost three-in-four households being better off overall, according to new Resolution Foundation research published today (Thursday).

Splitting the bill – funded by the European Climate Foundation – looks at how the Government can ease cost of living pressures by tackling Britain’s persistently high energy bills. Energy bills remain around £600 higher in cash terms than before Russia’s invasion of Ukraine, up 25 per cent in real terms.

To help hard-pressed families, the report says the Government should reassess the current system of paying for policies via household bills, which has effectively created a hidden tax and benefit system within energy bills that does not work for lower income households.

For example, the vast majority (more than 99 per cent) of the poorest half of British families will not benefit from bill-funded energy efficiency schemes but pay towards their costs. A simple switch to how energy policy costs are paid for – moving from billpayers to taxpayers – would deliver significant savings for most consumers, particularly for those on lower incomes.

Policy makers’ first port of call should be calling time on the outsourcing of welfare policies to energy bills.

The costs of the Energy Company Obligation and Warm Homes Discount currently on electricity bills should be funded by the Exchequer instead. Doing so would save households £50 per year, at a cost of £1.3 billion, and fix a poorly designed system where energy bills have become a vehicle for delivering key parts of welfare policy.

But with bills forecast to increase by £100 in April, Ministers should go further.

The Government should next look at energy policies such as the Renewables Obligation and Feed-in Tariff. Switching the cost of these important policies away from energy bills would deliver an average bill saving of over £100 to households this year, at a cost of £3 billion.

Focusing these measures on electricity bills would enable the Government to make progress on its statutory objectives of reducing fuel poverty and carbon emissions, as well as reducing bills this winter. But it should be done in a way that takes the stretched position of the public finances into account.

In total, bringing these policy costs in-house would cost £4.3 billion per year in 2025-26, but this would drop to around £3.5 billion in 2029-30 as associated costs fall. This cost would clearly need to be met through higher taxes elsewhere – but this is a switch from a tax on energy bills to other (fairer) forms of taxation not an overall rise in taxes.

Were the full cost to be spread across the entire tax base, the poorest fifth of households would see a net saving of £110 this year, and a middle-income household would be £40 better off. Overall, three-in-four families would benefit as they would see larger energy bill reductions than tax rises.

Another option to reduce bills would be to remove the 5 per cent VAT charged on electricity bills – saving a further £44. Cutting VAT on gas bills would have negative implications for the UK’s net zero transition. However, the Foundation cautions that a VAT cut comes with an uncertain and open-ended cost that could add further fiscal pressure onto the Exchequer. Furthermore, complications around VAT rules in Northern Ireland mean it would likely take far longer to deliver savings compared with simply bringing existing policy costs in-house.

Jonathan Marshall, Principal Economist at the Resolution Foundation, said:

“With energy prices a key driver of the high cost of living, the Government should act now to relieve some of the pressure on bills this winter, which will be felt by lower-income families the most.

“By changing how energy policy costs are paid for at the Budget in November, the Chancellor can deliver an immediate cut to electricity prices – helping vulnerable consumers and supporting the transition to net zero.

“The current system of paying for social and energy policies via bills is highly regressive and means we now have a tax and benefit system hidden inside our energy bills. Pushing some of the costs onto general taxation would deliver net savings of around £110 a year for lower income households.”