What Is Windfall Tax?

A windfall tax is a one off levy implemented by the government, it can be charged to any industry or sector that is recording profits from something they are not responsible for. In this case, Russia's full-scale invasion of Ukraine resulted in a shortage of oil and gas, driving prices up, and allowing profits to skyrocket.

How Does Windfall Tax Work?

Due to soaring energy costs, the Energy Profit Levy (EPL) was introduced by the UK Government in May 2022.

Originally, the temporary levy charged a 25% tax on oil and gas producers' profits after energy prices soared. In its first year, the tax raised £2.6 billion.

In January 2023, Chancellor Jeremy Hunt increased the windfall tax to 35%, Mr Hunt also announced earlier this month that the levy will remain in place until March 2029. However, the tax could end if prices drop, and remain at a certain level for a period of six months.

The windfall tax on energy companies currently does not apply to any electricity providers who generate power from wind or nuclear.

How Much is the UK Windfall Tax on Energy Companies?

Prior to the EPL being brought in, oil and gas firms operating in the North Sea typically paid 30% corporation tax on their profits and a supplementary 10% on top of that. However, this can be reduced by factoring in losses or necessary spending.

Energy companies including BP and Shell reported record high profits in 2022 when the tax was first introduced. BP recorded $27.7bn, while Shell saw its largest profit in the company's 115 years - $39.9bn.

In the first year of the levy, BP paid $2.2bn in tax, including $700m from the EPL. Whereas in 2023, BP said its North Sea business paid $1.5bn, $720m of which was EPL.

Shell paid £178m in UK windfall tax for 2022, and of their £1.1bn tax paid in the UK in 2023, £240m was taxed under EPL.

The UK Government believes that the extension would raise £1.5bn.

Benefits of Windfall Tax

Investment: Companies are offered tax breaks if they invest in oil and gas extraction. For every £100 they invest, they can claim tax relief of £91.40. Additionally, if providers spend £100 decarbonising the way they extract oil and gas they can claim up to £109.25 in tax benefits.

Further benefits, according to government sources, include energy security and British job security.