The Government will abolish VAT on energy-saving household measures such as solar panels, insulation, and heat pumps over the next five years.
Announcing the measure in his Spring Statement, Chancellor Rishi Sunak said it was “thanks to Brexit” that the changes could be introduced.
Previously, households had to pay five per cent VAT on energy saving materials as long as certain eligibility requirements – set by the EU – were met. In some cases, VAT was charged at a 20 per cent rate.
Mr Sunak said Brexit meant the UK is “no longer constrained by EU law” and could scrap the tax.
The VAT slash will mean that a family installing solar panels on their home “will see tax savings worth £ 1,000 pounds and savings on their energy bill of over £ 300 per year”, the Chancellor said.
It is also expected to cut the cost of installing cavity wall and loft insulation by hundreds of pounds.
Mr Sunak has been under pressure from Conservative MPs to slash the tax burden on energy-saving measures to drive down bills.
In a letter to the Chancellor earlier this week, MPs argued that improving energy efficiency is the fastest way to cut household energy bills amid the current energy crisis.
The UK has some of the draughtiest homes in Europe, leading to higher energy bills and greenhouse gas emissions. More than 19 million homes across the UK are rated band D or below for energy efficiency.
Plugging draughts and switching from gas boilers to heat pumps is needed to cut UK reliance on gas and meet climate goals, experts say.
The Government will also reverse the EU’s decision “to take wind and water turbines out of scope – and zero rate them as well”, the Chancellor announced.
He said the policies will not apply immediately to Northern Ireland due to “deficiencies” in the Northern Ireland Protocol but that support would be offered.
The fresh measures formed part of the Mr Sunak’s Spring Statement, in which he promised to “stand by” families struggling with soaring inflation.
The Chancellor announced two other immediate measures: cutting fuel duty and doubling the Household Support Fund to £ 1bn.
He also announced large tax cuts for workers, making changes to National Insurance contributions from July and pledging to cut income tax by May 2024.
One of the biggest policy announcements was increasing the National Insurance threshold from £ 9,500 to £ 12,570 from this July, which he branded “the largest single personal tax cut in a decade”.
The announcement was met with loud cheers from within the Chamber, as MPs have piled pressure on the Chancellor to alleviate the impact of the National Insurance risethat comes into effect from 1 April.