Raising the windfall tax on the UK’s oil and gas companies could undermine the government’s goal of boosting economic growth, according to industry body Offshore Energies UK (OEUK). The group warns that the planned tax hike could slash investment, resulting in a £13 billion loss to the UK economy from 2025 to 2029 and putting 35,000 jobs at risk.

The Treasury has responded by affirming its commitment to a “constructive dialogue” with the oil and gas industry over proposed changes to the Energy Profits Levy (EPL), the official name of the windfall tax. Set to rise from 35% to 38% on 1 November, the EPL targets the profits of UK oil and gas firms, which already face a unique tax structure with a 30% corporation tax and an additional 10% supplementary rate. This means that from November, energy companies operating in the UK will see a total tax rate of 78% on profits.

The government also intends to extend the levy until 2030 and tighten investment allowances, which have previously enabled companies to reduce their tax burden through investments in North Sea projects, including green energy initiatives. OEUK argues that these changes would diminish the sector’s capacity to support economic growth, a key priority for the government.

OEUK’s analysis suggests that while the increased tax could yield an additional £2 billion in the short term, it would ultimately result in a £12 billion loss in tax receipts. The industry body also predicts a sharp decline in investment, from £14 billion under current policies to just £2 billion by 2029, jeopardising 35,000 jobs in the same year due to halted projects.

David Whitehouse, OEUK’s Chief Executive, criticised the government’s approach: “This is a government that has made economic growth its main priority and yet our analysis shows that its policy will ultimately reduce this sector’s contribution to the UK economy.”

Introduced in May 2022 in response to soaring oil and gas prices, the EPL was designed as a temporary measure to fund household energy bill relief. OEUK argues that the initial “windfall conditions” no longer exist, making the extension and expansion of the tax unjustified.

A Treasury spokesperson reiterated the government’s stance, stating: “We are committed to maintaining a constructive dialogue with the oil and gas sector to finalise changes to strengthen the windfall tax, ensuring a phased and responsible transition for the North Sea. Our plans for a new National Wealth Fund and Great British Energy will create thousands of new jobs in the industries of the future.”

Meanwhile, business confidence is faltering as talk of tax increases and stricter employment rights dampens the UK’s business environment, according to Anna Leach, Chief Economist at the Institute of Directors (IoD). Following a three-year high in July, the IoD’s Directors’ Economic Confidence Index sharply declined in August. Investment intentions have seen the steepest drop since the onset of Covid-19 lockdowns, with revenue and headcount expectations also down.

“We are calling on the government to take time to get policy design right for the long-term, and deliver the stable tax and policy framework needed to drive business confidence and investment,” Leach urged.

Adding to the cautious outlook, the CBI Growth Indicator survey showed that private sector firms expect modest growth in activity in the three months to November. However, Alpesh Paleja, CBI’s Interim Deputy Chief Economist, described the overall picture as “very mixed,” with consumer-facing businesses struggling and manufacturing momentum remaining sluggish.

As the 30 October Budget approaches, Paleja called for measures to reduce costs, such as long-awaited business rates reform, and a clear business tax roadmap to attract investment. “All this can help to deliver the return to long-term sustainable growth that the new government has promised, and firms across all sectors want to see,” he added.

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Business confidence wanes amid fears of energy tax hikes