Energy prices are consistently hitting record highs. And this is causing problems across the country – including the cost-of-living crisis, which is reaching breaking point. Last month, UK Chancellor Rishi Sunak outlined a £15 billion support package to address the emergency. But where will this money come from?

The support package will be funded in part by a ‘windfall tax’ on energy firms. This tax – 25% on oil and gas profits – is expected to raise £5 billion over the coming year. This money will be redistributed around the country to assist households and businesses that are at risk of falling into energy poverty.

With inflation reaching an all-time high (9% in April), and with the energy price cap set to rise, the windfall tax should go some way towards alleviating the financial burden on households in the UK.

So, what exactly is the windfall tax, and how could it impact you?

What is a windfall tax?

A ‘windfall tax’ is typically levied upon companies that have made unexpectedly high profits, due to favourable market conditions in that industry sector, at any given time. It is usually temporary. As the current cost-of-living crisis continues unabated, this windfall tax on energy firms aims to restore balance amongst the country’s homes and businesses.

This comes after some of the largest energy companies, including BP and Shell, reported significant profit increases. These profit spikes are largely due to high oil and gas wholesale prices, following unexpected global events – such as Russia’s invasion of Ukraine.

The tax will specifically target these companies because they have benefited from these unprecedented times, even though they’re not responsible for the situation. Surging energy prices have meant that while energy companies have seen an increase in profits, households and businesses around the country have become more and more crippled by volatile energy prices.

How will a windfall tax on energy firms help households?

According to Sunak, the money raised from the windfall tax will mean that every household in the UK will receive a £400 discount on their energy bills, from October. This will not need to be reimbursed.

Eight million low-income households (including individuals who are on Universal Credit, tax credits, pension credit and other means-tested benefits) will also receive a one-off payment of £650. Payable in two instalments, this should also help with rising costs. Other areas will also see increased support, including:

• Pensioners – as households receiving the Winter Fuel Payment will receive a one-off payment of £300, in either November or December this year.
• Those with disabilities – individuals with disabilities will receive a £150 from September. If they are also considered to be on a low-income, they could also be entitled to the above-mentioned £650.

What does this mean for energy firms?

Under the new taxation regime, energy companies that reinvest their profits in oil and gas extraction in the UK will benefit from an investment allowance of 80%. This encourages them to reinvest.

Medium-sized oil and gas companies will be less affected by the levy, as much of their production will take place outside of the UK. The larger oil and gas companies will have substantial financial reserves, as well as diversified portfolios, and should therefore be able to absorb the loss.

However, there are concerns that the expense could cause problems for the energy industry, such as undermining the supply chain and deterring investment. This could be a concern during a time when energy security is under threat.

How can Monarch help?

Keeping up-to-date with constantly changing regulations and government schemes can be difficult. Especially while you are also trying to get on top of a turbulent energy market.

But knowing how these schemes operate could bring a number of different benefits.

At Monarch, we call on our expert team, with their years of experience, to give our clients the best solutions – including interpreting government legislation and the implications for your energy contracts.

We have our eyes on the ball, so you can rest assured that your energy contracts are in safe hands.

Get in touch today to find out how Monarch can help you reach your sustainable goals.