Care homes are set to benefit from a temporary reduction in VAT on qualifying electricity supplies this winter, following a new Government announcement aimed at reducing energy costs.
From 1 October 2026 to 31 March 2027, residential care homes that currently qualify for the reduced 5% VAT rate on electricity will see that rate temporarily reduced to 0%.
The announcement comes at the same time as Ofgem has confirmed a 4% increase to the domestic energy price cap from October, primarily reflecting higher wholesale gas prices linked to the ongoing conflict in the Middle East.
Importantly, care homes operating on commercial energy contracts are not covered by Ofgem's domestic price cap and will therefore not automatically face this 4% increase.
However, the wholesale market pressures behind the Ofgem announcement remain highly relevant to care providers approaching an energy contract renewal.
Qualifying residential care homes can currently receive electricity at the reduced VAT rate of 5%.
From 1 October, that rate will temporarily fall to 0% for electricity, providing six months of relief during the autumn and winter period when energy consumption can be particularly high.
The temporary measure will remain in place until 31 March 2027.
For care homes operating 24 hours a day, the reduction could provide a useful saving on electricity costs over the winter.
No.
The temporary VAT reduction applies specifically to qualifying electricity supplies.
Gas supplies that qualify for the reduced VAT rate will continue to be charged at 5%.
This distinction is particularly relevant given that wholesale gas prices have recently been experiencing renewed upward pressure.
Ofgem has announced that its domestic energy price cap will increase by approximately 4% from 1 October 2026.
However, this headline increase relates to domestic energy customers and should not be confused with commercial energy pricing.
Most care homes purchase their energy through non domestic contracts, which are not protected by Ofgem's domestic energy price cap.
This means care providers should not expect their energy bills to automatically increase by 4% as a result of the Ofgem announcement.
Although the price cap itself doesn't generally apply to care homes, the reasons behind the increase provide an important indication of what's happening in the wider energy market.
Ofgem has attributed much of the October increase to higher wholesale gas prices, with geopolitical tensions in the Middle East contributing to increased costs.
Commercial energy contracts are also influenced by wholesale gas and electricity markets.
For care providers, the key issue isn't therefore the 4% domestic price cap increase itself. It's the underlying wholesale market movement that contributed to it.
Providers approaching renewal could see different commercial rates depending on how those wholesale markets develop.
There are effectively two different developments to consider.
On the positive side, qualifying care homes will benefit from the temporary removal of VAT from electricity bills.
At the same time, wholesale energy markets continue to face uncertainty, particularly around gas prices and geopolitical developments.
The overall impact on an individual care provider will therefore depend on factors including:
This makes it important to look beyond headline announcements and understand what they actually mean for your individual energy arrangements.
The saving will depend on how much electricity a care home uses and its existing electricity costs.
For qualifying providers currently paying 5% VAT, removing that charge for six months will provide a direct reduction in the VAT element of their electricity bills.
For larger care homes and groups operating multiple sites, the combined saving could be more significant.
It is worth remembering, however, that the VAT reduction doesn't change the underlying unit price of electricity or protect businesses from movements in wholesale energy markets.
The announcement provides a useful opportunity for care providers to review their existing energy arrangements.
Consider checking:
If a qualifying residential care home is currently being charged the standard VAT rate, it may be worth investigating this now rather than waiting until October.
Will care homes get 0% VAT on electricity?
Qualifying residential care homes that currently benefit from the reduced 5% VAT rate will see VAT on electricity temporarily reduced to 0% from 1 October 2026 until 31 March 2027.
Will VAT on care home gas bills also fall to 0%?
No. The temporary measure applies to qualifying electricity supplies. Gas will continue to attract VAT at 5% where the reduced rate applies.
Will care home energy bills increase by 4% in October?
Not as a direct result of Ofgem's announcement. The 4% increase relates to the domestic energy price cap, which does not generally apply to commercial care home energy contracts.
Why does the Ofgem price cap matter to care homes?
The underlying wholesale gas and electricity prices influencing the domestic price cap also affect commercial energy markets. Rising wholesale costs can therefore influence the rates available to care providers when contracts are renewed.
Should care homes review their energy contracts now?
If your contract is approaching renewal, understanding your current position and the options available can help you make an informed decision in a volatile wholesale market.
Energy pricing can be complicated, particularly when headlines about domestic energy bills don't necessarily reflect what businesses will actually pay.
Quality Care Group's Energy team monitors wholesale gas and electricity markets to help care providers understand the developments that genuinely affect their organisations.
We can review your existing arrangements, upcoming renewal dates and energy consumption to help you understand your options and make informed procurement decisions.
If you'd like to understand how the temporary VAT reduction could affect your organisation or want to review an upcoming energy renewal, speak to the Quality Care Group Energy team.
