What is windfall tax and how does it work?

1 November 2022, 14:59

A higher windfall tax on energy companies is being called for
A higher windfall tax on energy companies is being called for. Picture: Alamy

By Zoe Adams

A windfall tax on electricity and gas companies could raise billions of pounds but what exactly is it? And how will it work during the cost of living crisis?

The cost of living crisis and the Ukraine war has seen soaring prices across the globe for everyday necessities such as gas, electric, oil, fuel, food and much more.

And now, after Shell and BP have just reported a huge three-month profit, there are calls for their taxes to be increased in order to raise more funds to help families in the UK.

In May, when Rishi Sunak was the chancellor of exchequer, he introduced a windfall tax on the UK oil and gas sector which aimed to bring in £5billion of the £15billion support package that was introduced for households struggling in the UK.

And now there are calls for further taxes, especially on electricity generators as they continue to make huge profits.

Read more: 'I can't afford it': Caller admits he hasn't been paying electric and gas bills

Read more: Mortgages, pensions and the value of the pound: How the economic turmoil might affect you

So what exactly is a windfall tax and how does it work? Here's the latest facts including what levy's are already in place:

BP sign and brand
BP is just one energy company to confirm huge profits. Picture: Alamy

What is a windfall tax?

A windfall tax is a one-off levy that a government can charge a sector or company that has made profits on something they were not responsible for - a windfall.

This is particularly relevant now as oil and gas companies will be making considerable gains as they see prices increase due to coronavirus restrictions lifting and the Russia and Ukraine war.

How does a windfall tax work?

Currently in place is Rishi Sunak's Energy Profits Levy which applies to profits made from extracting UK oil and gas.

The windfall tax, which could be in place until December 2025, is currently charged at 25% with the Treasury expecting to raise £5billion in its first year.

The windfall tax also allows energy companies to apply for tax savings for every £1 invested in fossil fuel extraction in the UK, encouraging them to make investments in the British energy supply.

The tax, at the moment, does not apply to any electricity companies who generate their power from wind or nuclear.

Previous examples of a windfall tax includes Labour chancellor Gordon Brown imposing one on privatised utilities in 1997.

Rishi Sunak the new prime minister
Rishi Sunak is under pressure to raise money as he looks at raising taxes. Picture: Alamy

Debate on whether or not to introduce windfall tax.

Will the windfall tax be increased on energy companies?

At the moment, this is a controversial topic. Nadhim Zahawi has said the existing levy is already enough as energy giants pay double the corporation tax of other businesses plus the windfall tax.

However, Ed Miliband has said Shell's latest profit figures are proof a higher tax could be applied.

More Latest News

See more More Latest News

North Macedonia Russia OSCE

Russia ‘will not review its goals’ in Ukraine, says Lavrov

Meghan has insisted she didn't leak the names of the royals at the centre of the race scandal to Omid Scobie

Meghan insists she didn't leak names of royals at centre of race row to Endgame author Omid Scobie

Children look at a washing machine. British Gas customers can get paid to reduce their energy this evening

Nearly half-a-million British Gas customers can get paid to reduce energy this evening

Pontins' Prestatyn and Camber Sands sites are set to shut with “immediate effect”

Pontins closes holiday parks with 'immediate effect' leaving Brits ‘heartbroken’ and holidays in disarray

Aslef train drivers have voted to go on strike

Rail misery continues as train drivers vote to go on strike for another six months

Police powers are minimising the effectiveness of protests - with groups like Just Stop Oil now being arrested within just 10 seconds.

Police powers are minimising the effectiveness of protests with eco-groups arrested within seconds

Nepal Same Sex Marriage

Nepalese couple vow to continue campaigning after same-sex marriage recognised

Mehmet Koray Alpergin (right) and Gozde Dalbudak (left) were snatched as they returned home from an Italian restaurant in Mayfair, central London, last October, the Old Bailey was told

Thugs guilty of killing DJ after torturing him to death while kidnapped partner heard his dying screams

Madagascar Election

Madagascar’s top court ratifies presidential election result after boycott

Susan Hall said her wallet had been stolen and the incident was an example of crime being out of control in London

'She dropped it': Good Samaritan who returned Susan Hall's 'stolen' wallet reveals he found it between Tube seats

Aslef union has promised rolling strikes between 1 and 9 December

Will your train journey be affected over the Christmas period? December strikes explained

King Charles warned Cop28 that the 'hope of the world' rested on the Dubai summit's shoulders today

'Hope of the world' rests on Dubai climate summit, King Charles tells Cop28

Exclusive
A Met Police officer tasered a 10-year-old girl

Father of girl, 10, tasered by police says officer's actions are a 'green light to go around tasering anybody'

Dozens of schools have been forced to close amid the snowfall

Dozens of UK schools forced to close as Brits wake up to snow - see the full list

Japan US Osprey Crash

Japan voices concern about US military using Osprey aircraft after fatal crash

Thousands of families face being kicked out of their homes ahead of Christmas

'It's about not having anywhere for my kids to sleep': 12,500 families face eviction by Christmas