How Does Rishi Sunak’s Oil and Gas Windfall Tax Work?

A new levy to be imposed on oil and gas companies is set to raise £5billion to underpin action to ease the cost of living crisis.

Chancellor Rishi Sunak announced the levy – which he declined to call a windfall tax – along with his package of measures to help households in distress

Brits face skyrocketing bills amid a cost of living crisis.

But how does the windfall tax actually work and do consumers benefit from the one-time fee?

Here’s everything you need to know about it.

A windfall tax in the form of a one-off levy levied on the profits of companies that have achieved surprisingly high or unexpected returns.

In the case of gas and oil companies, producers have seen rising profits after wholesale gas and oil prices rose dramatically following the start of the war in Ukraine and the Covid-19 pandemic.

Shell has reported a staggering £7.3 billion profit in the first quarter, while BP reported £4.9 billion profit, its highest in a decade.

During an announcement on Thursday May 26, Mr. Sunak announced the new windfall tax on gas and oil companies.

The Tories had previously opposed Labor-led calls for the levy, arguing that a tax would discourage businesses from investing in the future and put around 200,000 jobs at risk.

However, after companies such as BP and Shell announced multibillion-pound investments over the next decade, the government bowed to political pressure.

Currently gas and oil companies in the North Sea pay 30% corporation tax alongside an additional tax rate of 10%. However, they are often given larger capital grants to encourage investment, but this has often resulted in companies receiving more than they pay.

The new windfall tax will impose an additional temporary levy on their profits of 25%, with Mr Sunak saying this will bring in “around £5billion in revenue over the next year”.

The tax went into effect on May 26, 2022 and is expected to remain in place until profits return to normal levels.

Money from the Windfall Tax will be used to fund the UK’s cost-of-living support packages.

In his May 26 announcement, Mr Sunak outlined the financial support to the UK to ease the crisis.

Around eight million low-income households will receive a one-off payment of £650.

The Chancellor specified this support in the House of Commons with the words: “More than eight million households already have an income that is low enough for the state to cover their living expenses through the social system.”

“Right now they are facing incredibly difficult choices, so today I am able to announce that we will be making a one-off living cost payment of £650 direct to around eight million households on the lowest incomes, a grant worth over £5billion to reassure vulnerable people that we are by their side during this challenging time.

“DWP will make the payment in two lump sums, the first from July, the second in the autumn, with payments from HMRC for those with tax credits to follow shortly thereafter.”

The government will also give pensioners a one-off payment of £300 and a one-off disability living allowance of £150.

In addition, the Chancellor confirmed that a previously announced £200 payment has been scrapped.

This was viewed by many as a ‘loan’ as households were expected to repay this to the government in the long term.

Instead, all households will be given a grant of £400 to help meet rising living costs, which does not have to be repaid.

During his announcement, Mr Sunak said: “The outlook for energy prices has changed, I’ve heard people’s concerns about the impact of these repayments on future bills, so I have decided to cancel these repayments.

“This support is now clearly a benefit.”