Chancellor announces windfall tax on energy firms

  • Person icon Mercia Group
  • Calendar icon 26 May 2022 15:15

Chancellor Rishi Sunak has confirmed that energy firms will now pay a windfall tax when he revealed his latest package of measures aimed at combatting the cost-of-living crisis.  

However, while the much-anticipated announcement will have been welcomed by struggling households those business groups that have called for further support will have been left disappointed. 

Big Ben against a blue sky.

Acute distress 

Mr Sunak acknowledged the fact that high inflation is causing ‘acute distress’ and he knows people are struggling.  

He said the UK faces the highest rate of inflation for 40 years, while the Bank of England expects inflation to average 9% this year. 


Windfall tax 

Mr Sunak said a ‘temporary, timely, and targeted’ 25% Energy Profits Levy would be introduced for oil and gas companies, reflecting their extraordinary profits. 

The levy is expected to raise £5 billion for the Exchequer and the legislation will include a sunset clause to ensure it is temporary. 

As an incentive for energy companies to invest, the new levy will include a new 80% investment allowance, which will operate on the same lines as the super-deduction. This almost doubles the tax relief available to energy companies, meaning they will overall get a 91p tax saving for every £1 they invest.  


Support for households 

The Chancellor also announced a £15 billion package of support for households.  

Eight million of most vulnerable households across the UK will receive 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 

The October discount on energy bills will be doubled to £400 and the requirement to repay it over five years has been scrapped. 

Mr Sunak said: ‘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.   


Falling short 

However, the Chancellor’s announcement fell short of the emergency budget that the British Chambers of Commerce has been calling for. 

It also failed to reflect the Confederation of British Industry’s (CBI) demands that the government help stimulate growth, research and development and innovation. 

Meanwhile those hoping for a cut in the rate of VAT were also disappointed. 


Wrong signal 

Rain Newton-Smith, CBI Chief Economist, said:

Helping people facing real hardship amid one of the worst cost-of-living crunches in recent memory is the right thing to do. 

Despite the investment incentive, the open-ended nature of the energy profits levy - and the potential to bring electricity generation into scope - will be damaging to investment needed for energy security and net zero ambitions.

It sends the wrong signal to the whole sector at the wrong time against a backdrop of rising business taxation elsewhere.

The government must work with business on a genuine plan for increasing business investment and get growth going again, particularly in areas like energy efficiency.

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