Chancellor Rachel Reeves has announced an increase in the windfall tax on UK oil and gas companies, raising the levy from 35% to 38%, in Labour's Autumn budget 2025.
This tax hike is expected to generate £1.2 billion per year, with proceeds directed towards funding new energy policies and supporting households facing energy price rises amid a cost-of-living crisis.
Labour plans to keep this windfall tax rate, also known as the Energy Profits Levy, in place through the end of the current Parliament in 2030.
What is the windfall tax?
The windfall tax, originally introduced in May 2022, was designed to ensure that energy companies contribute more significantly during periods of extraordinary profits driven by global price hikes.
This follows reports of substantial earnings by major firms as 'British Gas announced they made £969 million in profit in the last year, almost double the profits they saw in 2022 whilst Eon, Scottish Power and EDF also announced record profits in 2023.
The rise in profits has fueled public criticism, with Labour highlighting the disparity between these gains and the financial strain experienced by households during a 'cost of living crisis' for many.
Windfall tax rise to 38%
Labour has announced plans to increase the windfall tax on oil and gas profits from 35% to 38%, aiming to bring in an additional £2 billion in short-term revenue.
This move, expected to take effect on November 1, will keep the windfall tax in place until 2030. Labour states that this increase will primarily fund its cost-of-living policies and public investments, including targeted relief for families struggling with high energy costs.
In a statement, a Labour spokesperson emphasised the motivation behind the measure, saying: "During the worst cost-of-living crisis in a generation, [the Conservatives] have sided with big oil and gas companies making record profits rather than hardworking families. We will introduce a proper windfall tax on the excess profits of these companies to support families and fund critical investments."
The plans were outlined in Labour's manifesto pledges and forms part of their Energy Security Bill to encourage more homeowners to move towards greener energy.
29% investment allowance removed
Rachel Reeves announced that, alongside a tax increase, the Labour government will remove the 29% investment allowance, which currently allows companies to offset tax by reinvesting capital.
Labour plans to redirect revenue from oil and gas to fund renewable energy projects. However, North Sea producers, such as David Whitehouse, OEUK's chief executive, warn that the higher tax rate could lead to a significant decline in investments in the ageing oil basin.
Reaction to windfall tax
James Alexander, CEO of the UK Sustainable Investment and Finance Association (UKSIF), expressed support for windfall tax rise, stating: “The windfall tax is an appropriate mechanism for taxing the record profits made by oil companies during the energy crisis. It’s designed to fund catalytic public investment into the sustainability transition, creating jobs that stand the test of time.”
However, industry representatives have raised concerns about potential impacts on jobs and investment. The energy sector body Offshore Energies UK (OEUK) warned: “The proposed changes to the windfall tax could reduce investment and put thousands of jobs at risk.”
According to OEUK, the increase could initially raise an additional £2 billion in revenue but may lead to a £12 billion reduction in future investment as companies reconsider their UK-based projects.
Labour’s manifesto underscores that this tax hike is a central part of its economic strategy, aiming to balance high profits in the private sector with urgent public needs while accelerating the UK’s transition to green energy.
