How does the oil and gas windfall tax work, how will it be paid, and who will benefit - new levy explained

A new levy to be imposed on oil and gas firms is set to raise £5billion to underpin measures to ease the cost of living crisis.

Chancellor Rishi Sunak announced the levy - which he declined to call a windfall tax, along with his package of measures to help struggling households

Brits have been facing skyrocketing bills amid a cost-of-living crisis.

In April, the energy price cap was raised to £1,971, while it is expected to be raised once again in October to £2,800.

But how does the windfall tax actually work, and will consumers benefit from the one-off levy?

Here’s everything you need to know about it.

What is a windfall tax?

A windfall tax of a one-off levy placed on the profits of companies who have produced surprisingly high or unexpected returns.

In the instance of the gas and oil companies, producers have seen soaring profits after the wholesale price of gas and oil increased dramatically following the start of the war in Ukraine and the Covid-19 pandemic.

Shell has reported an eyewatering £7.3billion in profts in the first quarter, while BP reported profits of £4.9billion, its highest in ten years.

How will the windfall tax work?

During an announcement on Thursday 26 May, Mr Sunak announced the new windfall tax on gas and oil companies.

The Tories had previously resisted Labour-led calls for the levy, arguing that a tax would discourage companies from investing in the future and putting around 200,000 jobs at risk.

However, after companies such as BP and Shell announced multi-billion pound investments over the next decade, the government bowed to political pressure.

Currently, North Sea gas and oil companies pay 30% corporation tax alongside a supplementary 10% rate. They are however often granted larger captial allowances to encourage investment, but this has often resulted in the companies receiving more than they pay.

With the new windfall tax, an additional temporary levy on their profits will be set at a rate of 25%, with Mr Sunak stating that this will raise “around £5billion of revenue over the next year”.

The tax took effect from 26 May 2022 and is expected to stay in place until profits return to normal levels.

What does a windfall tax on gas and oil comapnies mean for UK households?

The money raised from the windfall tax will be used to fund the UK’s cost-of-living support packages.

During his announcement on 26 May, Mr Sunak detailed financial assistance to help ease the crisis for Brits.

Around eight million low-income households will be sent a one-off payment of £650.

The Chancellor detailed this support in the House of Commons, saying: “Over eight million households already have income low enough for the state to be supporting their cost of living through the welfare system.”

“Right now they face incredibly difficult choices so I can announce today we will send directly to around eight million of the lowest income households a one-off cost-of-living payment of £650, support worth over £5billion to give vulnerable people certainty that we are standing by them at this challenging time.

“DWP will make the payment in two lump sums, the first from July, the second in autumn, with payments from HMRC for those on tax credits following shortly after.”

The government will also provide a one-off payment pensioners to the tune of £300, and a one-off disability cost-of-living payment of £150.

Additionally, the Chancellor comfirmed that a previously-announced £200 payment has been scrapped.

This was thought of by many as a “loan” due to the fact household would have been expected to pay this back to the government in the long-term.

Instead, a £400 grant will be given to all households to help with the spirialling cost of living which will not need to be paid back.

During his announcement, Mr Sunak said: “The outlook for energy prices has changed, I’ve heard people’s concerns over the impact of these repayments on future bills, so I’ve decided that those repayments will be cancelled.

“This support is now unambiguously a grant.”