How much of your energy bill is made up of tax?

  • Oops!
    Something went wrong.
    Please try again later.
·4-min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
Many people are worried they will not be able to heat their homes during the winter. (PA)
Many people are worried they will not be able to heat their homes during the winter. (PA)

Energy bills could rise to as high as £3,300 a year as the crisis in the fuel markets continues to affect the cost of living - but how much of the bill is just tax?

The latest estimates suggest that by winter 2022/23, bills could rocket to £3,304 a year from the current £1,971, putting even more stress on struggling households.

What's even more concerning is the £3,300 estimate produced by Cornwall Insights is £300 higher than the one they produced at the end of June - showing that if anything, the price of energy is still rising.

With the war in Ukraine still raging and the rest of Europe also feeling the pain, there are fears the crisis could last longer than originally hoped.

Due to the large expected rise, there have been calls for the Tory party leadership candidates to outline what they will do to help with the cost of living crisis.

Read more: Families 'resorting to stealing baby formula due to cost of living crisis’, government warned

The cost of energy has soared in recent months. (PA)
The cost of energy has soared in recent months. (PA)

Read more: Tory leadership candidates promising tax cuts to fix cost of living crisis have 'lost touch with reality'

Different candidates have outlined vague plans so far, with Rishi Sunak saying his priority is to get inflation down rather than cutting taxes, which many of the other candidates have said they want to do.

Lizz Truss said at the launch of her leadership campaign: "Under my leadership, I would start cutting taxes from day one to take immediate action to help people deal with the cost of living."

Tom Tugendhat has promised to cut fuel duty by 10p if he wins.

The government has already announced billions in support for people struggling with the crisis.

How much of your energy bill is tax?

According to Ofgem, the majority of what you pay for your energy bill is made up of the wholesale cost of the energy itself.

Ofgem regulates the price cap, which is the maximum an energy company can charge a household for their gas and electricity per year.

Watch: Cost of living: What is the energy price cap and why are bills rising so sharply?

Read more: Families paying an extra £500 a year to fill up cars with petrol

It was created by the government to avoid sudden and unexpected price hikes and it is reviewed by Ofgem every six months and takes into account different changes in the energy markets.

The current price cap is £1,971 and just over half of that is the cost of what your energy company pays to either buy or produce the energy.

Your bill is made up of the following costs:

Wholesale energy costs, £1,077

This is how much a supplier has to pay to get the gas and electricity to supply households with energy.

Energy companies use forward pricing to buy their energy.

This is the process of agreeing to buy a set amount of energy on a predetermined date at a price set at the time of the contract.

This helps properly plan their costs and helps them avoid volatility.

But, this consequences of lag in the market, meaning if the price of gas falls suddenly it isn't immediately translated to the consumer because the energy company agreed to buy at a time prices were higher.

Adjustment allowance £0

This is an extra charge placed on all customers by energy companies for them to make up their losses from customers who did not pay their bills.

A large part of your energy bill is used to pay for repairs to energy infrastructure. (Getty)
A large part of your energy bill is used to pay for repairs to energy infrastructure. (Getty)

This is currently extremely low due to government intervention but it is likely to rise as more and more people struggle to pay their bills.

Network costs £371

This is the regional costs of building, maintaining and operating the pipes and wires that carry energy across the country to households.

Policy costs £153

The costs related to government social and environmental schemes to save energy, reduce emissions and encourage the take-up of renewable energy.

Operating costs £203

The costs incurred by suppliers to deliver billing and metering services, including smart metering.

Direct debit payment method uplift allowance £16

The additional costs incurred by suppliers to bill customers with direct debit as their payment method.

Headroom allowance £22

This allows suppliers to manage unexpected costs and be competitive in the market by quickly deploying cheaper deals when they have the opportunity to.

Earnings Before Interest and Taxes £35

This is the business's profit.

5% VAT £94

This is how much tax you pay on your energy bills. VAT is usually 20% but for energy it is 5%.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting