What is the windfall tax on oil and gas companies?

Rising oil prices have put the spotlight back on the amount of money energy firms are making since prices surged at the beginning of the Iran war.

Energy firms operating in the UK are subject to a windfall tax that was introduced in 2022 to help limit household gas and electricity bills.

Companies and trade bodies in the oil and gas sector have argued the levy is hitting jobs and investment.

The government has said a new windfall tax on oil and gas companies will be introduced in 2030, which it says will give the sector long-term certainty.

A windfall tax is a levy imposed on companies that have benefited from something they were not responsible for - in other words, a windfall.

Global oil and gas prices started to rise in late 2020 as demand increased after the lifting of global Covid restrictions, but they soared in 2022 following Russia's invasion of Ukraine.

The increase in prices generated bumper profits for energy companies, which in turn led to calls for a windfall tax.

The Energy Profits Levy - the formal name for the windfall tax - was introduced in May 2022 by the then Chancellor, Rishi Sunak.

The government said the money raised would fund support for households facing rising energy bills, through the Energy Price Guarantee, which ran from October 2022 to June 2023.

The levy applies to profits made from extracting UK oil and gas. It was initially set at 25% and was due to expire at the end of 2025.

However, it was increased and extended by both the previous Conservative government and the current Labour government.

It now stands at 38% and is due to remain at that level until 31 March 2030, unless - as originally set out by the previous Conservative government - oil and gas prices drop below a certain level for six months.

In the 2025 Budget, the government announced that it would bring in a new Oil and Gas Price Mechanism (OGPM) to replace the Energy Profits Levy when it ends.

The OGPM will act as a windfall tax when oil and gas prices are "unusually high", the government said.

The new levy will be based on revenues and will apply an additional tax rate of 35% above price thresholds of $90 a barrel for oil and 90p a therm for gas.

As well as a windfall tax on oil and gas firms, there is also a separate levy that applies to "extraordinary returns" from some low-carbon electricity generating firms in the UK, who make large profits when gas prices spike.

Larger operators started paying the Electricity Generator Levy on 1 January 2023. That levy had been due to end on 31 March 2028.

However, in April 2026, the government announced that the levy on "excess profits" made by these electricity generators would rise to 55% from 1 July, and that the tax would also be extended beyond 2028.

The government hopes the threat of the tax increase will encourage these firms to switch to fixed-price contracts.

When oil and gas prices surged at the outbreak of the war in Ukraine, profits at the major UK energy firms also jumped.

In 2022, both BP and Shell reported bumper results. BP posted record annual profits of $27.7bn (£20.8bn), while Shell's profits hit $39.9bn - the highest in its 115-year history.

As energy prices fell back, so did the companies' profits. BP reported profits of $7.5bn in 2025, while Shell's were $18.5bn.

But BP's profits for the first three months of 2026 more than doubled from a year earlier to $3.2bn. The volatility in the oil price since the start of the Iran war led to an "exceptional" performance at its oil trading business.

However, both BP and Shell have significant operations overseas, which are not covered by the levy. Shell makes about 5% of its revenue in the UK.

The US-Israeli war with Iran has pushed energy prices back up again as the conflict has effectively shut the Strait of Hormuz - a key waterway which normally carries about 20% of global oil and liquid natural gas supplies.

As a result profits at all the major energy companies are expected to increase, if the conflict persists and oil prices remain high.

In the first year of its operation, the financial year 2022-23, the Energy Profits Levy raised £2.6bn.

The following year, 2023-2024, it brought in £3.6bn.

In the most recent year for which data is available, 2024-25, the levy raised £2.9bn.

Oil and gas firms operating in the North Sea are taxed differently to other companies.

They pay 30% corporation tax on their profits and a supplementary 10% rate on top of that. In contrast, other firms with profits over £250,000 a year pay 25% corporation tax.

When the windfall tax is added, it means the overall tax rate on profits earned by oil and gas companies operating in the UK is 78%.

However, oil and gas firms can reduce the amount of UK tax they pay by factoring in losses or spending on things like decommissioning North Sea oil platforms.

In some years, it means companies have received more money back from the UK government than they have paid in tax.

Energy firms have also been able to reduce the amount of windfall tax they pay through certain investment allowances, although some of these were removed in November 2024.

Oil and gas industry bodies have been strongly against the tax, arguing it has made investment in the sector less attractive.

In 2024, when the levy was increased from 35% to 38%, 42 companies wrote to the government to express their "grave concern" over the changes.

The decision not to change the levy in the November 2025 Budget was also criticised by the industry.

Trade body Offshore Energies UK (OEUK) had argued that reforming the tax would ultimately increase income for the government, as it would unlock investment which would protect thousands of jobs and, over time, lead to higher tax receipts

Following the Budget, OEUK said the failure to reform the EPL in 2026 would "cost tens of thousands of jobs, cripple investment, and undermine Scotland and the UK's energy security".

A government spokesperson said: "We're giving the sector and its investors the long-term certainty to plan, invest and support jobs with plans to replace the Energy Profits Levy when it ends by 2030, or earlier if its price floor is triggered.

"We are also making sure the North Sea has a prosperous and sustainable future through record investment that helps deliver the next generation of skilled jobs while growing the clean energy industries of the future."