What's in your electricity bill? VAT, levies and policy costs explained
Short answer first: your electricity bill is two charges plus VAT. You pay a unit rate for every kilowatt hour (kWh) you use, a standing charge for every day, and VAT on top. Costs such as wholesale energy, network upkeep and government policy schemes are baked into those two charges rather than shown as separate lines.
Since 1 October 2026 the VAT part has been 0% for household electricity in Great Britain. Everything below is from Ofgem, GOV.UK and the Budget 2026 document, read on 29 October 2026. Rules and rates move, so check the date on anything you use.
The two charges you can see
Ofgem explains that a bill has a unit rate, the price of each unit of energy you use, and a standing charge, "which you pay every day even if you do not use any energy on that day".
For a default tariff paid by Direct Debit, averaged across Great Britain, Ofgem's figures for 1 October to 31 December 2026 are:
| Electricity | Rate |
|---|---|
| Unit rate | 26.32p per kWh |
| Standing charge | 54.83p a day |
Your own rates depend on your region, tariff and payment method. They will be on your bill or in your supplier account.
The costs hidden inside those charges
Ofgem lists what the price cap is built from. None of these appear as a line on your bill, but they are all paid for through the unit rate and standing charge:
- Wholesale costs: buying energy on the open market.
- Network costs: building and improving the pipes and wires that carry energy.
- Policy costs: supporting government social and environmental schemes, such as the Warm Home Discount.
- Operating costs: the supplier's day-to-day running, including customer service, metering and debt.
- Profit: what the supplier makes before interest and tax.
- Headroom: an allowance for uncertain costs and risks.
- Levelisation: keeping the standing charge the same for prepayment and Direct Debit customers.
Ofgem doesn't give a pounds-and-pence split of these on the pages I read, so I won't guess one. If you see a pie chart with exact percentages, check which cap period it is for, because the shares move every quarter.
VAT: 0% on electricity for now
VAT on household electricity in Great Britain is at 0% from 1 October 2026. HMRC's guidance gives the dates as 1 October 2026 to 31 March 2027, and it applies in England, Scotland and Wales.
The Budget 2026 document extends it "for another three months, until July 2027", and says that is expected to take around £50 off the annual Ofgem price cap in April 2027. It also says the relief is expected to apply in Northern Ireland from April 2027. I covered the rest of the Budget in my Autumn Budget post.
Gas is different. Ofgem still lists VAT at 5% on gas for 1 October 2026 to 31 March 2027.
You don't need to do anything. It comes off the price you pay automatically.
What that is worth to you
Here is an illustration with the Ofgem rates above and a household using 2,500 kWh of electricity a year. That figure is mine, not Ofgem's, so swap in your own.
| Per year | |
|---|---|
| Units: 2,500 kWh at 26.32p | £658.00 |
| Standing charge: 365 days at 54.83p | £200.13 |
| Bill at 0% VAT | £858.13 |
| VAT at 5%, if it were charged | £42.91 |
VAT applies to the standing charge as well as the units, which is why the saving shows up on both. The more you use, the more the zero rate is worth.
Policy costs: what has already come off
Policy costs have been the most argued over part of the bill. Two changes are already in place this year.
From 1 April 2026, the government says it ended funding for the Energy Company Obligation (ECO), forecast to save £59, and funded 75% of the Renewables Obligation through general taxation, forecast to save £88. With the VAT effect of £7, it describes the total as a rounded £150, from an average of £154 per household.
Looking ahead, the Budget says "no new policy costs will be put on bills until a comprehensive Cost Control Framework is in place". That is a freeze on new costs. It is not a promise that the existing ones go away.
Standing charges: coming next
The Budget asks Ofgem to abolish gas standing charges, aiming for the end of 2027, with the cost moving onto the unit rate. For electricity, the government says it will "set out details next year". Nothing has changed for your electricity standing charge yet.
How to check your own bill
- Find your rates. Look for the unit rate in pence per kWh and the standing charge in pence per day. Check whether the rates are shown with or without VAT. If you are on Economy 7 or another time-of-use tariff, you will have more than one unit rate, such as a day rate and a night rate.
- Check your usage. Use the kWh on your bill or smart meter, not a national average.
- Multiply it out. Units times the unit rate, plus days times the standing charge, plus VAT. If you have more than one unit rate, multiply the units used in each period by that period's rate and add them up. If it doesn't match your bill, ask your supplier why.
- Compare tariffs on your usage. A higher standing charge with a lower unit rate suits heavy users. The opposite suits light users. Our Should I switch? tool takes your smart meter data and works out what you would have paid on each tariff.
If you want to see how the unit rate changes through the day on a time-of-use tariff, my post on who Octopus Agile suits is a sensible next read.
The short version
- Your bill is a unit rate, a daily standing charge and VAT.
- Wholesale, network, policy and operating costs are inside those charges, not listed separately.
- VAT on household electricity in Great Britain is 0% until July 2027 (the original cut ran to 31 March 2027).
- Policy costs fell in April 2026, and no new ones are planned until a Cost Control Framework exists.
Next step: pull out your latest bill, find the unit rate and standing charge, and work out what 2,500 kWh, or your own figure, costs you.