Policy paper

Energy Profits Levy — reforms 2024

Published 30 October 2024

Who is likely to be affected

Oil and gas companies that operate in the UK or on the UK Continental Shelf.

General description of the measure

The Energy Profits Levy is a temporary levy on profits arising from the upstream production of oil and gas, in addition to the permanent tax regime of Ring Fence Corporation Tax which is charged at 30% and the Supplementary Charge which is charged at 10%.

This measure increases the rate of Energy Profits Levy by 3 percentage points to 38%, extends the end date of the Energy Profits Levy to 31 March 2030, and removes the Energy Profits Levy’s Investment Allowance. This measure also reduces the rate of the Decarbonisation Investment Allowance to 66% to maintain its cash value following the Energy Profits Levy rate increase.

The government will publish a consultation in early 2025 on how the government will respond to price shocks once Energy Profits Levy ends.

Policy objective

Money raised from these measures will support the transition to clean energy, improving energy security and independence, while providing sustainable jobs for the future and helping protect energy bills against future price shocks.

Background to the measure

The Energy Profits Levy was introduced in May 2022 to tax the extraordinary profits of oil and gas companies operating in the UK or the UK Continental Shelf.

In July 2024 the government announced that the rate of the Energy Profits Levy would increase, that the Investment Allowance would be abolished, and that the capital allowances and Decarbonisation Investment Allowance would be reviewed, with final details set out at Autumn Budget 2024. Stakeholder engagement was carried out over the summer of 2024.   

Detailed proposal

Operative date

These measures will take effect from 1 November 2024.

Current law

The Energy Profits Levy was introduced by The Energy (Oil and Gas) Profits Levy Act 2022 (‘the Act’) with effect from 26 May 2022. The Energy Profits Levy is currently set at a rate of 35%, bringing the total headline rate of tax on upstream oil and gas activities to 75%.

The Energy Profits Levy has two investment allowances:

• the 29% Investment Allowance
• the 80% Decarbonisation Investment Allowance

The Energy Profits Levy was due to expire on 31 March 2029, unless oil and gas prices both fall to thresholds set out in the Energy Security Investment Mechanism for a sustained period, in which case regulations will be laid to end the levy. 

Proposed revisions

In Finance Bill 2024-25, the government will amend section 1 of the Act to increase the rate of Energy Profits Levy to 38%, and to extend the end date of the levy to 31 March 2030.

Finance Bill 2024-25 also replaces section 2 of the Act to remove the Investment Allowance, but retain the Decarbonisation Investment Allowance. To ensure the cash value of the Decarbonisation Investment Allowance remains the same, the rate of the Decarbonisation Investment Allowance is reduced to 66% in section 2 of the Act.

Summary of impacts

Exchequer impact (£ million)

2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030
+195	+470	+220	+50	+410	+955

These figures include the fiscal impact from relief for payments made by oil and gas companies into a Carbon Capture Usage and Storage Decommissioning Fund. These two measures have been costed separately and the cost or yield estimates have been combined to protect commercially sensitive information relating to specific taxpayers used in the Carbon Capture Usage and Storage costing. The cost of relief for the Carbon Capture Usage and Storage changes is a very small proportion of the overall costings.

These figures are set out in table 5.1 of Autumn Budget 2024 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2024.

Economic impact

These changes to the Energy Profits Levy are not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

There is no indirect or direct impact on individuals as this measure only affects businesses. 

Equalities impacts

It is not anticipated that there will be impacts for those in groups sharing protected characteristics.

Impact on business including civil society organisations

This measure will have a negligible administrative impact on up to around 200 companies operating in the UK or on the UK Continental Shelf. One-off costs will include familiarisation with these changes. There is not expected to be any continuing costs.

Customer experience is expected to remain broadly the same following these changes to the Energy Profits Levy as it does not alter how businesses would interact with HMRC.

This measure is not expected to impact on civil society organisations.

Operational impact (£ million) (HMRC or other)

HMRC’s operational changes for these measures are estimated to be £330,000.

Other impacts

Environmental impacts have been considered. While no substantive impact on territorial UK oil and gas consumption is anticipated, there is the potential that the level of investment companies make in relation to upstream oil and gas projects in the UK may be impacted. Whether there are wider carbon impacts will depend on the nature of investment decisions taken by the companies. Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from companies’ tax payments and returns.

Further advice

If you have any questions about this change, contact the oil and gas policy team at oilandgaspolicy@hmrc.gov.uk.