Analysis: To ease living costs, UK’s new prime minister is doing what Nigeria won’t

Barely 48 hours after taking office, Britain’s new Prime Minister, Andy Burnham, announced one of the clearest policy signals of his administration: remove Value Added Tax (VAT) from household electricity bills to help families struggling with the cost of living.

From 1 October, the UK will temporarily reduce VAT on domestic electricity from 5% to zero, a move the government says will save the average household about £45 a year, reduce inflation slightly and provide “breathing space” ahead of winter. The measure will be funded by cancelling a planned £1.8 billion (₦2.52 trillion) digital identity programme.

“We’re taking immediate action to cut taxes on energy bills, put more money in people’s pockets and bring back hope,” Burnham said.

Chancellor John Healey described the policy as giving families “some breathing room on bills” while helping ease inflation.

On its own, a £45 (₦63,000) annual saving is modest. Yet the politics behind the decision is arguably more significant than the amount. It reflects a broader principle: when energy costs become a major driver of household hardship, governments can choose to cushion the blow through tax policy.

A different response in Nigeria

Nigeria has faced one of the sharpest cost-of-living crises in decades. Since President Bola Tinubu removed petrol subsidies in May 2023 and liberalised the foreign exchange market shortly afterwards, inflation has surged, while transport, food, electricity and other essential costs have climbed sharply.

Electricity tariffs have also risen substantially for many consumers, particularly Band A customers, even as power supply remains unreliable.

Unlike Britain, however, Nigeria has largely relied on pricing reforms rather than temporary tax relief to ease household energy costs.

Consumers continue to pay 7.5% VAT on electricity bills, meaning tax is added to the cost of power after energy charges and other applicable fees are calculated.

For households and small businesses already struggling with high tariffs, VAT increases the final amount payable each month.

What would removing VAT mean?

Unlike subsidies, removing VAT would not require government to lower electricity tariffs directly. Instead, it would reduce the tax component of every electricity bill.

Consider a household with a monthly electricity bill of ₦100,000 before VAT. At the current 7.5% VAT, the final bill rises to ₦107,500.

Removing VAT would save that customer ₦7,500 every month, or ₦90,000 a year. The higher the electricity bill, the larger the savings.

For manufacturers, small businesses and households that depend heavily on electricity, such savings could help offset rising operating costs.

The fiscal trade-off

Removing VAT is not cost-free. VAT contributes to government revenue, and exempting electricity would reduce tax collections unless offset elsewhere.

Britain’s government explicitly paired its tax cut with spending reductions, arguing the policy would be fully funded through cancellation of another programme.

Nigeria would face similar trade-offs. The question is not simply whether the government can afford to forgo VAT revenue, but whether relieving pressure on households and businesses would generate broader economic benefits through higher spending, lower inflationary pressure and stronger business activity.

The UK policy also highlights differing approaches to managing a cost-of-living crisis. Britain’s electricity prices have risen because of higher wholesale energy costs, including market pressures linked to geopolitical tensions in the Middle East. Even so, the government’s first instinct was to reduce the tax burden on consumers.

Nigeria’s energy challenges are different. As Africa’s largest crude oil producer and a major natural gas producer, its electricity and fuel costs are shaped not only by global events but also by domestic policy choices, infrastructure constraints and market reforms.

Removing VAT would not solve Nigeria’s electricity shortages or eliminate the need for power-sector reform. Nor would it erase the impact of inflation or currency depreciation.

But it would send a clear signal about who bears the burden of adjustment. At a time when electricity has become an increasingly expensive necessity rather than a discretionary expense, the debate is no longer just about tax revenue. It is about whether fiscal policy should be used not only to raise government income, but also to soften the cost of essential services for households and businesses.