UK to fight rising energy costs with 25% windfall tax

UK Prime Minister Boris Johnson’s government will introduce a 25% windfall tax on oil and gas producer profits, while alleviating the pain of soaring household energy bills with a £15 billion package.

This temporary windfall tax for oil and gas producers will bring the headline tax rate on any profits occurring after the 26 May from 40% to 65%. The tax will be removed after 31 December 2025.

Meanwhile, the UK Government financial assistance package will benefit struggling households with a £400 discount on their energy bill from October, with greater aid to be issued to the lowest income households.

UK Chancellor Rishi Sunak said energy companies were making extraordinary profits while the rest of the country was suffering.

“We will introduce a temporary and targeted energy profits levy, but we have built into the new levy a new investment allowance that means companies will have a new and significant incentive to reinvest their profits,” he said.

“The more a company invests, the less tax they will pay.”

The new Investment Allowance will almost double the tax relief available for companies’ investments.

Mr Sunak said the tax will raise £5 billion over the next year and will then be phased out as oil and gas prices return to normal.

The newly announced financial assistance package is worth £15 billion, after a similar £9 billion package was rolled out in February.

To-date government assistance this year will amount to £37 billion to help households deal with the current times.

Over eight million low-income households will benefit from the scheme with a one-off £650 cost of living payment.

Rising inflation and surging energy prices

Last week, the UK energy regulator said it expects a cap on gas and electricity bills will rise by another 40% in October as result of energy prices continuing to surge across the globe.

Capital Economics chief UK economist Paul Dales said the government’s fiscal support provided from will benefit the economy going forward.

“The extra fiscal support for households revealed by the chancellor today falls short of fully offsetting the reduction to households’ real incomes from higher utility prices, but it will cushion the blow and support economic activity,” he said.

Inflation levels reached a 40-year peak recently in April, with the UK Government expecting levels to continue to rise.

Mr Sunak says the Bank of England will be able to use interest rates to bring the current situation under control.

“The high inflation we are experiencing now is causing acute distress for people in this country,’ he said.

“I know they are worried, I know people are struggling.”

Companies likely to be affected

Britain’s biggest oil and gas producer Harbour Energy’s (LON: HBR) shares responded negatively after Mr Sunak’s announcement but quickly recovered shortly after.

Harbour Energy produces roughly 191 barrels of oil a day, 50bbl more than the second largest producer in the country.

Oil company EnQuest (LON: ENQ) could be impacted by the windfall tax, as shares plummeted in response to the news – the biggest daily drop in over a month for the company.

Major global players BHP and Shell are less likely to be affected by the UK policy.

A Shell spokesperson said the investment allowance relief measure was a “critical principle” of the levy.

“We have consistently emphasised the importance of a stable environment for long-term investment,” the spokesperson said.

Countries across Europe taking action

The UK government isn’t the only one pledging to mitigate the rising prices, with other European governments vowing to also invest tens-of-billions euros.

The European Union is playing its role, publishing a “toolbox” of measures its members can use without violating competition rules, “including subsidies to help poorer households, funding for renovations that reduce energy use or exempting vulnerable households from higher energy taxes”.

In March, the German government agreed to issue extra cash to its workers and families, along with cheaper petrol and lower public transport fares in an effort to fight the increasing power and heating costs.

France committed to restricting an increase on regulated electricity costs at 4%, while also implementing a government package of over €25 billion towards helping companies with the cost of higher gas and power bills.