The temporary levy on the profits of oil and gas companies will be applied at a rate of 25% and is expected to raise around £5bn in its first 12 months. Noting that the sector had been making ‘extraordinary profits’ due to surging global commodity prices driven in part by the war in Ukraine, Sunak stated that these profits must be ‘taxed fairly and incentivise investment’.

The new energy profits levy includes a new 80% investment allowance, similar in style to the super-deduction, aimed at encouraging oil and gas companies to invest by saving them 91p for every £1 they invest. This nearly doubles the tax relief available and means the more a company invests, the less tax it will pay, according to HM Treasury.

The levy does not apply to the electricity generation sector – where extraordinary profits are also being made due to the impact that rising gas prices have on the price paid for electricity in the UK market.

The energy profits levy will be phased out when oil and gas prices return to historically more normal levels.

Support package
Among the cost of living support measures unveiled, the UK Chancellor announced that the universal energy bills discount due to come in from October is being doubled from £200 to £400, while the requirement to pay it back will be scrapped. This means households will receive a £400 discount on their energy bills from October.

The Chancellor also reported that almost all of the 8mn most vulnerable households across the UK will receive support of at least £1,200 this year, including a new one-off £650 cost of living payment. There will also be separate one-off payments of £300 to pensioner households and £150 to individuals receiving disability benefits – groups who are most vulnerable to rising prices, including the cost of energy.

The UK’s energy regulator Ofgem recently warned that typical household energy bills are set to rise by £800 in October, to £2,800/y. Bills had already risen by £700 on average in April. Ofgem CEO Jonathan Brearley has also said that the number of people in fuel poverty (spending 10% or more of disposable income on energy) in the UK may double to 12mn.

Industry reaction
Reacting to the new windfall tax, Deirdre Michie, Chief Executive of Offshore Energies UK (OEUK), which represents 400 companies involved in the offshore oil, wind and gas sector, said the energy profits levy would discourage UK offshore energy investments, including wind and other low carbon energies. She also said it would result in declines in oil and gas exploration and production, and so force an increase in imports. ‘This is the exact opposite of what was promised in the British Energy Security Strategy [in April],’ she stated. 

She had earlier noted that oil and gas operators were already due to pay some £7.8bn in taxes this year (a 20-fold increase on two years ago), equating to about £279 per UK household.

Meanwhile, BP commented that the levy ‘is not a one-off tax – it’s a multiyear proposal’ and that ‘we will now need to look at the impact of both the new levy and the tax relief on our North Sea investment plans’. Earlier in April, BP CEO Bernard Looney had stated that none of BP’s planned £18bn UK investments would be mothballed if a windfall tax was introduced.

Shell said that it would continue with its investment plans despite the impact of the tax, planning to invest £20–25bn into the UK over the next decade, with some 75% of its spending to be concentrated on low and zero carbon projects. Highlighting the need for a ‘stable environment for long term investment’, Shell noted that the proposed tax relief on investments was a key factor in the new windfall tax.

Meanwhile, environmental groups felt the energy profits levy did not go far enough. Greenpeace’s Ami McCarthy said: ‘This windfall tax will serve only as a sticking plaster. By only skimming the top 25% off oil and gas company profits, Sunak has missed a huge opportunity to tackle the root cause of the cost of living crisis and the climate crisis together.’