Windfall tax on energy firms explained: How do I get Rishi Sunak's new £400 discount?

26 May 2022, 14:07 | Updated: 26 May 2022, 14:23

Brits will now get £400 shaved off their soaring energy bills and no longer need to pay it back as part of Rishi Sunak's revised cost of living help package.

The Chancellor, who has also U-turned on charging a windfall tax on energy firms, doubled the initial £200 loan designed to help households pay their heating and electricity bills.

But he also scrapped the planned automatic repayments on that, meaning consumers will no longer need to pay back the sum.

Here's how you'll get the discount and why it's been implemented.

How do I get my £400? Do I apply or will it just come out of my bills, and when does it arrive?

The discount, providing it works the same as the previously-announced £200 loan called the Energy Bill Discount Scheme, will automatically apply to your energy bills from October.

The money will be paid to energy suppliers and then get passed on to each electricity customer.

Sunak announces energy grant is now definitely a grant

That means you shouldn't have to apply or fill out any kind of form – it'll just automatically start dampening the price you pay on bills from October.

There's no action needed on the consumer's part.

Read more: Sunak gives every household £400 off energy bills after windfall tax U-turn

What is the £400 grant for?

Energy bills are skyrocketing as part of the wider inflation crisis.

The wholesale energy prices, which providers pay, are going up, so providers are following suit.

A cold winter in Europe, a hot period across Asia and reduced gas exports from Russia are all playing havoc with the forces of supply and demand for energy.

The end result is that Brits are paying more for their bills, with Ofgem predicting the next price cap rise, in autumn, could see a hike of almost £1,000 to the £2,800 region.

How will the discount work?

It will make your energy bill cheaper than it otherwise would be.

A discount of £400 does not cover the expected price cap rise, so expect to see your bills go up, but it will help to keep the increase down.

The move follows Rishi Sunak's U-turn on windfall tax - he previously resisted calls to use a windfall tax on energy firms to fund a bigger cost of living package than previously announced.

What is a windfall tax?

Speaking in the Commons, after weeks of opposition party demands for a windfall tax, Mr Sunak did everything he could to avoid the w-word.

Instead, he unveiled the "temporary targeted energy profits levy" - a windfall tax in all but name.

A windfall tax is made on large profits that are considered to have been unfairly or undeservedly made.

Mr Sunak made a point of explaining his view on how energy firms had made heaps of money in recent months.

"The oil and gas sector is making extraordinary profits, not as the result of recent changes to risk-taking or innovation or efficiency, but as the result of surging global commodity prices driven in part by Russia's war," he told MPs.

"For that reason I am sympathetic to the argument to tax those profits fairly.

He added: "Like previous governments, including Conservative ones, we will introduce a temporary targeted energy profits levy, but we have built into the new levy... a new investment allowance similar to the super-deduction that means companies will have a new and significant incentive to reinvest their profits.

"The new levy will be charged on profits of oil and gas companies at a rate of 25%.

"It will be temporary and when oil and gas prices return to historically more normal levels the levy will be phased out."

What else has Rishi Sunak announced?

Besides doubling the £200 loan and turning it into a grant and the U-turn on the windfall tax, a one-off grant of £650 will also be made to eight million households that are most vulnerable to the cost of living squeeze.

Pensioners will get a one time £300 payment and disabled people will get £150.

What criticism is Sunak facing over his announcement?

Opposition figures, industry bodies and think tanks lined up to take aim at Mr Sunak's plans.

Labour’s shadow chancellor Rachel Reeves criticised Tory opposition to the windfall tax, which Labour has long-backed, and told Mr Sunak: "I know that the Chancellor has adopted two of our ideas today, but can I ask why he has not adopted a third: a cut in VAT on energy bills?

"It was once touted as the 'big Brexit bonus', but he has ditched that too."

Rain Newton-Smith, chief economist at the Confederation of British Industry, said: "Helping people facing real hardship amid one of the worst cost-of-living crunches in recent memory is the right thing to do.

"Despite the investment incentive, the open-ended nature of the energy profits levy - and the potential to bring electricity generation into scope - will be damaging to investment needed for energy security and net zero ambitions.

"It sends the wrong signal to the whole sector at the wrong time against a backdrop of rising business taxation elsewhere.

The Institute for Fiscal Studies director Paul Johnson tweeted: "Disappointing to hear the Chancellor again conclude by claiming to be cutting taxes.

"He emphatically is not. He is raising them, and to historically high levels. I think that is the right thing to do, but his tax plan is to raise taxes not, as he keeps saying, to cut them."