UK Chancellor Jeremy Hunt is considering a new 40% windfall tax on the “excess returns” of electricity generators as part of his sprawling package of tax rises and spending cuts this week, according to a person familiar with the proposal.
The tax will replace a plan by Prime Minister Rishi Sunak’s predecessor, Liz Truss, to instead cap the revenue of renewable and nuclear power producers from next year, the person said. The levy will be in addition to a current windfall tax on the profits of oil and gas firms, which is set to be extended to 2028 and increased from 25% to 35% as part of Thursday’s economic statement.
Hunt and Sunak are trying to fill an estimated £55 billion ($65 billion) hole in the public finances, with around 40% of the savings coming from tax rises and 60% from spending cuts.
Sunak gave his strongest hint yet on Monday that he will keep the “triple lock” on UK state pensions, protecting them against the impact of soaring inflation.
The two windfall taxes on the energy sector are expected to raise more than £45 billion over six years, depending on future energy prices, according to the Financial Times, which first reported the plan.
The levy on power generators will be applied to “excess returns” produced above a certain price per megawatt hour, the newspaper said.
Energy bills are set to rise for Brits from April, with Hunt likely to raise the government’s current price freeze at £2,500 for the average household to £3,100. Hunt is considering following the government’s current model of giving targeted payments to those on means-tested benefits, disability benefits and the state pension to cushion the blow, the person familiar said.
Hunt is also under strong pressure to raise state benefits in line with inflation. The Times reported that Hunt has agreed to do so and will also accept an official recommendation to increase the national living wage by nearly 10% to about £10.40 an hour.
There are fears though that in electricity generator’s coffers, it could hamper future investment.
Ben Jones, co-head of global tax at Eversheds Sutherland, said: “In addition to a potential increase in the oil and gas energy profits levy to 35% over an extended period, it is increasingly likely that the UK will also introduce a new “excess returns” tax on energy generators more widely. This could apply a 40% tax rate to profits earned on excess returns above a designated price per megawatt hour.
“We are already seeing a destabilising impact on UK oil and gas investment arising from the potential energy profits levy increase, which raises concerns regarding the impact of a wider energy generation tax on future investment in the UK energy sector. The energy sector is an easy and popularist target for tax revenue generation, but short-term gain must be balanced against the need for long-term investment in the full spectrum of the UK energy sector. In particular, the potential impact on renewable energy investment seems contrary to wider UK climate change and energy security commitments and it is hoped that any new tax is designed with continued incentives for the development of clean, long-term energy solutions in the UK.”
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