Due to the cost-of-living crisis spurred by the war in Ukraine, energy prices are soaring. Because of this, the British government has decided to use a £5 billion windfall tax on oil and gas companies.
What is a windfall tax?
The gas and oil industries have thrived during this period of strife and are reporting massive increases in their profits. Energy giant Shell reported a record first quarter profit. BP’s first quarter profits were their largest in a decade.
This windfall tax will help fund a total of £15 billion in payments to UK households. A windfall tax is a tax on companies with extremely high profits that have typically come from favourable market conditions rather than the company’s drive and ability to innovate. It will lessen the strain on low-income families.
This comes after the British government has been accused for not doing enough to help households during this crisis which has left people to make increasingly difficult choices with their money. The UK’s annual inflation rate is expected to hit over 10% later this year. It is expected that disposable incomes will be greatly limited.
In April, the amount that around 22 million households pay on energy bills rose to about £2,000 per year. This came after the energy bill cap rose by 54%. The agency that sets these price caps, the Office of Gas and Electricity Markets, says that the cap may increase in October by an additional £800. This is because energy bills are predicted to rise higher by autumn.
Because of this, the original repayment plan was scrapped and improved in order to provide households with more fiscal support during this period of high inflation.
How will this impact British energy?
Energy firm profits will now be taxed 25%. This amounts to around one third of the direct payments cost for households. The plan includes an investment allowance, which will cut the tax for companies who reinvest profits into Britain. Policymakers hope this will incentivise companies to bet on Britain’s sustainability efforts.
However, if operators in the North Sea claim additional investment allowances within the next 3 years, there may be extra tax lost.
Shell has committed to investing a maximum of £25 billion in British energy over the next decade. The company claims that the investment allowance will be critical for them to continue with their investment plans to maintain a balanced environment. BP said that by 2030, it would invest £18 billion in the UK’s energy systems.
These kinds of taxes are usually in place for one year. However, this tax could remain in place either until 2025 or once energy prices return to a normal level.
The United States may soon follow suit. Spain has already extended tax cuts for household energy bills and will continue the levy they have placed on companies. France has made it so that energy prices cannot increase by more than 4%.
Who will receive aid?
Apart from those in Northern Ireland, each UK household will receive £400 towards their energy bills starting in October. This will replace the previous decision to provide households with £200 towards their energy bills. The £200 would have needed to be paid back over 5 years.
In addition to this, households who receive tax credits, pension credit, Universal Credit, etc. will receive two one-time payments totalling £650. Low-income pensioners will receive an additional £300 on top of the Winter Fuel Payment. Individuals with disabilities will receive £150 in September. They may also be eligible for the £650 if they are on a low-income.
It is apparent that Britons are beginning to feel the effects of skyrocketing prices. Almost 90% said that they have seen an increase in their cost of living because of the higher costs of food, energy, and petrol. According to the Office for National Statistics, people have also reported that they are trying to reduce their use of energy at home and take less journeys by car. Some polls are also showing that people are dining out less, only buying food that is essential, and ordering fewer takeaways.
These measures should help the households that are struggling to make ends meet. However, there is still the fear that even incomes which have been adjusted for inflation will be extended too far since businesses have not received sufficient support.
It is crucial to keep abreast of changing information and ways that you can protect yourself and your assets. If you have any questions about how Private Client Consultancy can devise a strategy that accounts for inflation and changes in the cost of living, contact us today.
We are also running an inflation-focused seminar in Portugal on the 9th of June. Click here to find out more.