Currently, the 0% VAT relief on energy saving materials, which begun in April 2022, is set to expire on 31st March 2027. After which, qualifying measures will return to the 5% reduced rate unless the Government chooses to extend it. A decision on the future of the relief is therefore likely to be required at one of the forthcoming fiscal events, potentially as early as the 2026 Autumn Budget. Ministers will need to weigh the fiscal cost of maintaining the relief against the policy objectives it was introduced to support. That decision comes at a time of increasing fiscal pressure, creating a risk that short-term revenue gains are prioritised over longer-term economic and policy outcomes. 

Our analysis outlines the impacts of reintroducing the 5% VAT rate on energy saving materials on heat pump deployment, treasury receipts, and economic value. Our modelling suggests that reintroducing the higher rate would reduce demand, leading to fewer heat pump installations, lower levels of economic activity and slower growth across the wider supply chain.

We recommend that the Government:

• Extend the 0% VAT relief for Energy Saving Materials until at least 2030, aligning it with the Warm Homes Plan and Boiler Upgrade Scheme funding period
• Confirm any extension as early as possible to provide certainty for consumers, installers, manufacturers and investors
• Maintain consistency between tax policy and decarbonisation objectives by avoiding additional costs on technologies that reduce energy demand, emissions and reliance on imported fossil fuels
• At a minimum, retain the current scope of qualifying Energy Saving Materials and review the relief before 2030 using observed deployment data and market evidence