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Windfall tax of 25% on O&G profits introduced as further support measures announced by government

Chancellor Rishi Sunak has expanded measures initially announced in February. Image: Gov.UK.

Chancellor Rishi Sunak has expanded measures initially announced in February. Image: Gov.UK.

Chancellor Rishi Sunak has announced a windfall tax of 25% on oil and gas companies in the UK, alongside further measures to support consumers amid record high power prices.

The Energy Profits Levy, as its been dubbed, will help cover the cost of providing a range of support mechanisms to help tackle the current cost of living crisis. In order to increase the incentive to invest, the new levy will include a 80% investment allowance.

According to the Treasury, this approach will allow the government to deliver support while encouraging investment and growth.

Alongside this, the energy bills discount of £200 set to come into effect in October will be doubled to £400, and the requirement to pay it back will be scrapped. This builds on the initial support measures announced by Sunak in February alongside the increase in the price cap for the summer period of 54%.

Earlier this week, Jonathan Brearley, CEO of regulator Ofgem, warned that the continued market volatility, spurred by the Russian invasion of Ukraine, could lead to the price cap jumping to £2,800 for the winter period.

“We know that people are facing challenges with the cost of living and that is why today I’m stepping in with further support to help with rising energy bills,” said chancellor Rishi Sunak.

“It is also right that those companies making extraordinary profits on the back of record global oil and gas prices contribute towards this. That is why I’m introducing a temporary Energy Profits Levy to help pay for this unprecedented support in a way that promotes investment.”

The levy on oil and gas company profits at 25% is expected to raise around £5 billion in its first 12 months, the government said. This is designed to be temporary, and if gas prices return to historically normal levels it will be phased out.

The Investment Allowance introduced alongside it will mean companies save 91p for every £1 they invest. This nearly doubles the tax relief available, ensuring the more a company invests, the less tax they will pay.

It comes as oil and gas companies have reported record profits, with bp reporting £9.5 billion ($12.8 billion) in profit for 2021 and Shell reporting £14.2 billion (US$19.3 billion) for 2021.

The Treasury has clarified that the levy will not apply to electricity generators, and instead pointed to the recent Energy Security Strategy, within which it announced the government would consult with the power generation sector and investors on the best path to drive forwards energy market reforms to ensure the price paid for electricity is more reflective of the cost of production.

Sunak has today announced that he will further evaluate the scale of profits made by those in the energy sector and the appropriate steps to take.

Today’s support mechanisms come alongside a wider cost of living support package that will see most vulnerable households receive £1,200, including a new one-off £650 cost of living payment according to the government. This includes a boost to £400 for Universal Support and a £15 billion support package targeted towards millions of low-income households.

More on this story to follow...


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