Two things land on the same day, 1 October 2026, and they pull in opposite directions: VAT on domestic electricity drops from 5% to 0%, and Ofgem’s price cap goes up. Between them they change the one number that decides whether a heat pump is cheaper to run than a boiler.
Here’s the plain-English version, with the arithmetic shown.
What’s actually changing
VAT off electricity, for six months. The Government is zero-rating VAT on domestic electricity in England, Scotland and Wales from 1 October 2026 to 31 March 2027. It applies to the unit rate and the standing charge, and to people on fixed tariffs as well as variable ones — you shouldn’t need to do anything to get it. Gas is not included: gas keeps its 5% VAT.
The price cap goes up anyway. On 26 August Ofgem confirmed the cap for 1 October to 31 December: up about 4% (£60 a year) to £1,723 for a typical dual-fuel household paying by direct debit. Without the VAT cut, the same announcement would have been a rise of roughly 6%.
So the VAT cut isn’t a saving landing on top of your current bill. It’s a discount that absorbs most of an increase that was coming regardless.
The numbers
These are Ofgem’s average rates for England, Scotland and Wales, standard variable tariff, direct debit. October’s electricity figures already have VAT at 0% in them; the gas figures still include 5%.
| Jul–Sep 2026 | Oct–Dec 2026 | |
|---|---|---|
| Electricity unit rate | 26.11p/kWh | 26.32p/kWh |
| Electricity standing charge | 57.19p/day | 54.83p/day |
| Gas unit rate | 7.33p/kWh | 7.97p/kWh |
| Gas standing charge | 29.04p/day | 29.68p/day |
Look at the shape of that. Electricity is essentially flat — the underlying price rose, and the VAT cut cancelled it out. Gas is up nearly 9%, with no VAT cut to soften it.
What it does to the spark gap
The spark gap is the ratio between the price of a unit of electricity and a unit of gas. It’s the number that decides the heat pump running-cost argument: if your heat pump’s efficiency (SCOP) beats the spark gap, it’s cheaper to run than a gas boiler.
On the rates above:
- Jul–Sep: 26.11 ÷ 7.33 = about 3.6
- Oct–Dec: 26.32 ÷ 7.97 = about 3.3
That’s a real move in a single quarter, and it happens because electricity stood still while gas went up. A well-designed heat pump delivers a SCOP of 4.0 or better, so it was already ahead of gas — this widens the margin rather than creating it.
What a unit of heat costs
Same rates, run through boiler and heat pump efficiencies. Our own workings, not Ofgem’s:
| Heat source | Cost per kWh of heat, from 1 October |
|---|---|
| Heat pump at SCOP 4.0, dedicated heat-pump tariff (~18p) | ~4.5p |
| Heat pump at SCOP 4.0, standard electricity tariff | ~6.6p |
| Gas boiler at 90% efficiency | ~8.9p |
| Oil boiler at 85%, kerosene around 90p/litre | ~10p |
| Bulk LPG boiler | ~14p |
| Direct electric heating (panel heaters, storage, immersion) | 26.3p |
Two things worth pulling out of that table.
If you’re off the gas grid — which is most of the Highlands — none of this is close. Oil and LPG got no VAT cut, no cap protection and no help from this announcement at all. Heating oil has drifted up through August rather than down. A heat pump on a standard tariff already costs roughly a third of LPG heat and around two-thirds of oil heat, before you count the Home Energy Scotland grant of up to £7,500 (up to £9,000 rural) towards the install.
If you’ve already moved off fossil fuel, you get the whole VAT cut and none of the gas rise. A house running a heat pump with no gas meter buys only electricity, so the zero-rating applies to everything it burns — including that standing charge, which is worth about £200 a year on its own.
The catch, and it’s a real one
This is six months, not a policy change. On 1 April 2027 VAT goes back to 5% unless something changes. On today’s underlying prices that would put electricity back around 27.6p and push the spark gap back to roughly 3.5.
Which is why we’d say the same thing we’d have said in August: don’t make a heating decision on a six-month tax measure. A heat pump at SCOP 4 beats a gas boiler at a spark gap of 3.6, at 3.3, and at 3.5 — the VAT cut moves the margin, not the answer. The structural story is the one that matters, and it’s been moving the same direction for a few years now as policy costs come off electricity bills.
Common questions
Do I need to apply for the VAT cut? No. Suppliers are expected to apply it automatically from 1 October, on variable and fixed tariffs alike. It should show on the electricity part of a dual-fuel bill; the gas part will still carry 5%.
Will my direct debit go down? Not necessarily. The cap is going up overall, so for most dual-fuel households the VAT cut offsets an increase rather than producing a refund. If you’re all-electric you’re more likely to see an actual reduction.
Are these the rates I’ll pay in the Highlands? Not exactly. Those are Britain-wide averages — regional network costs mean unit rates and standing charges vary, and northern Scotland’s standing charges are among the highest in the country. The direction of travel is the same everywhere; the pennies differ. Our monthly price table refreshes with the new cap in October.
Does this change what a heat pump costs to install? No. Installation of a heat pump in a home is already 0% VAT until 31 March 2027 under a separate, longer-standing relief — that’s unrelated to this month’s announcement.
So is now a good time to switch? It’s a better time than it was, but the honest answer is that it depends on your building, not on the tax year. We start every job with a room-by-room heat-loss survey, because a heat pump that’s designed properly hits SCOP 4 and one that isn’t doesn’t — and that gap matters far more than 5% VAT. Ask us to run the numbers on your house, or get an indicative heat pump estimate online in a couple of minutes.
Sources: Ofgem price cap announcements for 1 July–30 September and 1 October–31 December 2026; HM Government announcement on zero-rating VAT on domestic electricity from 1 October 2026 to 31 March 2027. Heat costs are our own calculations from those published unit rates, using 90% gas boiler efficiency, 85% oil boiler efficiency and SCOP 4.0. Oil and LPG prices are market averages and vary a lot by location and delivery size.