Hunt Considers Extending UK Windfall Tax on Oil And Gas at Budget

(Bloomberg) -- Chancellor of the Exchequer Jeremy Hunt is weighing proposals to extend the UK’s windfall tax on the profits of oil and gas companies as one of several revenue-raising options under consideration to help finance personal tax cuts at his budget next week.

Extending the energy profits levy, a 35% charge which is due to expire in March 2028, is on a list of possible measures being reviewed by the finance minister, according to people familiar with the matter who requested anonymity discussing budget plans that haven’t been finalized. The list, which also includes potentially scrapping the non-domiciled tax status, details measures the chancellor could deploy to free up cash for cuts in income tax or national insurance if forecasts from the Office for Budget Responsibility detailing his fiscal headroom fail to improve, they said.

Maintaining the energy levy for an extra year would increase the tax take in 2028-2029, the crucial fifth year of the OBR’s forecast horizon during which Hunt’s own fiscal rules state that the national debt must be falling. That would give him a bit of extra breathing space to ease other taxes. None of the people disclosed an estimate of how much revenue extending the tax would generate, but the OBR predicts it will raise £1.9 billion ($2.4 billion) in 2027-2028.

With Britain’s tax burden rising to its highest level since World War II under their watch, Hunt and Prime Minister Rishi Sunak are under pressure from their restless Conservative Party to cut taxes in the March 6 budget, as an offering to voters in a general election due within 11 months. The Tories trail have trailed Labour by a wide margin for more than a year in national polling, and — with both the windfall tax and non-dom status on their radar — now appear to be looking to take some of the opposition party’s policies as they gear up for the campaign.

One of the people said that extending the energy profits levy is low down the list of potential measures under consideration, suggesting it may not end up being deployed in the budget. The Treasury didn’t immediately respond to a request for comment.

Labour’s policy is to increase the rate of the windfall tax to 38% and extend it by a year, while it has long said it plans to end non-dom status in its current form. Shadow Chancellor of the Exchequer Rachel Reeves has already ruled out several potential revenue raisers for a future Labour government, including lifting the three main tax rates of income tax, national insurance and value added tax. That means her options are limited, and any Tory moves to implement plans advanced by Labour would further curtail what she and Labour Leader Keir Starmer could do in government. 

If Hunt were to both scrap the non-dom tax status and extend the energy profits levy, it would leave Labour hamstrung because the opposition party have been assuming they would be able to use revenues from both measures to fund parts of their policy program.

Sunak first announced the windfall tax when he was Chancellor of the Exchequer in May 2022, in order to help fund grants to British households suffering under a record squeeze on living standards amid a surge in fuel bills made worse by Russia’s invasion of Ukraine.

The levy was originally set at 25%, and was additional to taxes amounting to 40% of profits – bringing the combined tax rate to 65%. At the time, the Treasury estimated it would raise £5 billion in the first 12 months. In November 2022, the levy was raised to 35%, and extended its application until the end of March 2028, from an earlier deadline of the end of December 2025.

The tax has ended up raising less than initially forecast, with the government’s monthly receipts data suggesting about £6 billion has been collected to date. The OBR’s forecasts indicate another £3.6 billion is expected over the 2024-25 tax year, with takings tapering to £1.9 billion in 2027-2028.

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