The new measures will see the VAT rate on gas and electricity bills temporarily cut from 13.5% to 9%.
The Government has announced new measures in an effort to offset the financial impact of the ongoing energy crisis.
Along with a reduction in VAT on energy bills, there are proposals for an additional three weeks' payment of the fuel allowance. Here’s all you need to know.
Cutting VAT rates on energy bills
The Cabinet has agreed to cut the VAT rate on energy bills from 13.5% to 9%.
Minister for Finance Paschal Donohoe confirmed on Wednesday that the lower VAT rate will be in place from May 1st until the end of October.
It’s understood that this temporary measure will only cover gas and electricity, and not solid fuels or home heating oil, which has skyrocketed in price by 127% over the past year.
Paschal Donohoe said that the cost to the Exchequer of the rate cut would be an estimated €46m.
The reduction will be implemented through an amendment to the Finance Act, which will occur after Easter.
How much will energy bills be lowered?
The reduction of 4.5% in VAT will result in a cut of approximately €49 to annual gas bills, and €61 to annual electricity bills, according to Paschal Donohoe. However, as the new lower VAT rate will only apply for six months, the savings are likely to be half this level.
Paschal Donohoe has said that these measures will offset the scheduled increase in carbon tax, which is due to come into effect on May 1st.
The carbon tax increase will add around another €20 a year to the average annual gas bill and €20 per fill of a 900-litre oil tank.
What other measures are being implemented?
The Government has reportedly spent over €1.9 billion since the Budget in October in a bid to mitigate energy price increases. Previous measures announced in the cost of living package include:
- A universal €200 credit on electricity bills.
- Reductions of 20c per litre and 15c per litre respectively on excise duty for petrol and diesel.
As well as cutting VAT on gas and electricity bills this month, the Government announced multiple other new measures.
Fuel allowance extension
A one-off lump-sum payment of €99 has been approved for those who are receiving the Government’s fuel allowance.
This is the equivalent of three extra weeks of the fuel allowance payment and will benefit about 370,000 households nationwide.
The PSO levy will be scrapped
The Public Service Obligation (PSO) levy on electricity bills is expected to be discarded.
The PSO is charged to all electricity customers in Ireland and currently the levy is €51.60 a year (ex. VAT) or €58.57 (inc. VAT). This works out at just under €10 on every household's bi-monthly bill.
However, this reduction is not expected to be introduced until later this year, in October.
Excise duty cut extension
The cuts to excise duty on petrol and diesel, which were announced last month, will last until Budget 2023.
Will the measures be enough?
Gas and electricity prices have skyrocketed over the past 18 months. Some suppliers have even increased their prices by over 100% during this time.
While the VAT rate is a step in the right direction, more measures are likely to be needed.
Like all consumer goods and services, VAT is levied on the net price. So, as the unit price of gas and electricity has increased, the Government’s tax take has increased too.
This means that despite the reduction in VAT, most households will still be paying more in tax to the Government each month than they were in late 2020, right before the energy crisis started to unfold.
It’s also important to note that this reduction in VAT is coming into effect at the start of summer when energy demand significantly reduces. The VAT rate is due to revert back to 13.5% when energy demand typically increases again, in autumn.
So, what can energy customers do?
While the €200 electricity credit and the reduction in VAT will help with the financial burden of the current energy crisis, if you want to save more on your energy bills consider switching to a cheaper supplier.
Currently, there are 13 energy suppliers in the Irish market, who are all competing for new customers. To attract new business, these suppliers offer discounts of up to 30-40% off standard energy rates.
If you’re curious about how much money you could save by switching supplier, head over to our energy comparison page. Here you’ll be able to view the best deals against your current energy supplier.
Making the switch through bonkers.ie is easy and could save you hundreds on your annual energy bills.
You can learn all about how to get cheaper energy bills on bonkers.ie in our Quickstart Guide.