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The energy windfall tax - what it means for you

A £15bn energy windfall tax package was announced yesterday by Chancellor Rishi Sunak. Here’s what it could mean for you.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Yesterday the Chancellor, Rishi Sunak, unveiled plans to introduce a windfall tax on oil & gas profits to help ease the cost-of-living crisis.

Here’s what it could mean for you.

This article isn’t personal advice. If you’re not sure what’s right for your circumstances, seek advice. Investments can rise as well as fall in value, so you could get back less than you invest.

The cost-of-living package

George Trefgarne

The total £15bn package includes a £5bn windfall tax on oil & gas profits. The tax will help fund relief to consumers and bring substantial benefits to those on low incomes. However, judging by the stock market reaction so far, it won’t seem to have as big of an impact for investors.

New legislation will be introduced to implement the energy profits levy, which will increase corporation tax in the sector from 40% to 65%. This is expected to last until 2025, when the levy will then expire. The increase is higher than the 10% proposed by Labour, but will be offset by a new generous investment allowance.

Mr Sunak said that for every £1 of investment, oil & gas companies could receive 91p of tax deductions.

In total, he expects to raise £5 billion from the levy. The money for the rest of his spending will be found either from additional borrowing or existing resources. Another organisation benefiting from inflation is the Treasury and its tax revenues, coming in better than expected after Mr Sunak froze income tax and other thresholds and raised national insurance.

One unanswered question is whether electricity generators like Drax, SSE and Centrica, who are also making substantial profits, will also be hit by new taxes. Mr Sunak said he’s “urgently evaluating the scale of their profits” and will decide what steps to take later in the year.

Has Mr Sunak done enough to stave off a recession, which the Bank of England has said is a risk by the end of the year? With Ofgem forecasting that the energy price cap will rise by a further £800 per average household to £2,800 in the autumn, he’s softened that blow, especially for the poorest consumers. But it comes at the cost of him adding further to the highest tax burden for 70 years.

George Trefgarne is CEO of Boscobel & Partners, a political consultancy. Hargreaves Lansdown may not share the views of the author.

Help’s on the way, but how long will it take?

Helen Morrissey, Senior Pensions and Retirement Analyst

Here’s what the total £15bn package includes:

  • A £650 one-off cost of living payment to the 8m lowest income households on universal credit, tax credits, pension credits and legacy benefits.
  • A separate £300 payment to pensioner households receiving the winter fuel allowance.
  • £150 to individuals on disability benefits.
  • All households’ get support with their energy bills doubled to £400, with the requirement to pay it back through future bills scrapped.

The £15bn package will no doubt be a valuable lifeline to many struggling to make their budgets stretch, but there are challenges.

While many people are receiving their £150 council tax rebate shortly, people are faced with an agonising wait to receive the rest of the support.

The £650 cost of living payment for instance is paid in two instalments, one in July and the second in Autumn. Pensioners will have to wait until November/December for their £300 winter fuel payment.

Some will have capacity in their budgets to meet their bills over the coming months before this support arrives. However, there are concerns many others will continue to struggle for a while yet.

Why are energy prices so high and what will it mean?

Susannah Streeter, Senior Investment Analyst

A chunk of profit might still be scooped from the oil and gas majors. But the energy price levy will still represent just the cream on the top of fat volumes of cash being generated by energy giants due to the higher price of oil.

A barrel of Brent crude, the international benchmark, is up by around 50% since the start of the year – pushed higher by the outbreak of war in Ukraine.

The natural gas price has risen relatively by even more, tripling since this time last year to around 148p per therm. Having hit a record 510p per therm after Russia’s invasion of the Ukraine, it’s actually been depressed in recent weeks by a glut of imported gas in the UK system.

The energy price levy might mean dividends are pushed lower temporarily. But given the tax will reduce if companies invest more, it’s likely to mean an acceleration of investment by the sector.

It’s not clear exactly what range the normal pricing will be for the windfall tax to be blown away, but a lower oil price would see the levy being lifted.

However, for now, the price of oil and gas are set to stay elevated due to significant supply concerns.

The US has banned Russian energy imports and the UK will phase them out by the end of 2022. An EU crude embargo on Russian oil is inching closer amid ongoing discussions about concessions to Hungary, a country which is heavily reliant on the imports. If a ban is slapped on, European countries would look elsewhere in the world for their needs.

OPEC+, the cartel of oil producing nations, has been hesitant about turning on the taps more, adding to the squeeze in supplies, partly due to production capacity issues.

The wariness among energy companies about investing in fossil fuels as pressure mounts for the transition to greener energy, appears to be acting as a cap on money flowing into production.

Meanwhile demand is staying buoyant, despite ongoing concerns over China’s zero-Covid policy leading to a drop in consumption. Recent data for mid-May showed a fall in U.S. crude and gasoline inventories. This comes just as demand for oil is expected to rise in the coming weeks. Millions of Americans are set to release pent-up demand for travelling and head off on trips over the summer.

Slowing economies however could pull down the price of oil. The UK is forecast to enter recession by the end of the year and US economic growth is also expected to cool off. Both could lower demand for crude.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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