Concerns Mount as Windfall Tax Hike Threatens UK Economic Growth and Business Confidence

The UK’s energy sector is raising alarms over the government’s plan to increase the windfall tax on oil and gas companies, a move that Offshore Energies UK (OEUK) warns could undermine the economy. The Energy Profits Levy (EPL) is set to rise from 35% to 38% on November 1, pushing the total tax rate on profits made by energy firms in the UK to 78%. OEUK predicts that this hike, along with the extension of the levy until 2030 and tighter investment allowances, could result in a £13 billion loss to the UK economy between 2025 and 2029 and place 35,000 jobs at risk. The government introduced the EPL in May 2022 to offset soaring household energy bills during a time of surging oil and gas prices. However, OEUK argues that the conditions that justified the tax have since passed, and continuing to increase the levy could stifle investment in the sector, leading to long-term economic damage. According to OEUK's analysis, while the tax increase may bring a short-term boost of £2 billion in revenue, it could result in a £12 billion loss in tax receipts over time, alongside a dramatic drop in investment from £14 billion to £2 billion by 2029.

The controversy over the windfall tax comes amid a broader decline in business confidence in the UK. The Institute of Directors (IoD) reported a sharp drop in business leader optimism, with their Directors' Economic Confidence Index falling from a three-year high in July to a significant low in August. The IoD cited fears over tax rises and increased employment rights as key factors denting confidence. Investment intentions for the coming year have also seen their steepest decline since the early days of the Covid-19 pandemic. As the government prepares for the upcoming Budget on October 30, business groups like the IoD and the Confederation of British Industry (CBI) are calling for a stable tax and policy framework to restore confidence and encourage investment. The CBI’s latest survey indicated that while private sector firms expect modest growth in the coming months, the overall outlook remains mixed, with manufacturing and consumer-facing businesses continuing to struggle.

Business leaders are urging the government to take a measured approach in the Budget to support long-term growth, with recommendations ranging from business rates reform to a clear business tax roadmap. The challenge for the government will be to balance its fiscal responsibilities with the need to foster a favorable environment for business investment and economic recovery.