What is a windfall tax?

A windfall tax is a one-off or temporary extra tax on companies that make unexpectedly large profits. These profits come from events they did not cause, such as an energy price spike. The best-known UK example is the Energy Profits Levy on North Sea oil and gas profits, set at 38% until March 2030.

The idea is that some profits are not earned through better products or hard work, but through outside shocks. Taxing them is seen as fair and less harmful to investment than an ordinary tax rise. Critics reply that it makes the tax system unpredictable, which can put off long-term investment. Governments often use them when public anger is high, such as during an energy crisis that pushes up household bills.

The UK has used windfall taxes several times. In 1981 a tax hit bank profits from high interest rates. In 1997 the new government charged privatised utilities to fund a jobs scheme. In May 2022 the Energy Profits Levy was introduced at 25% on oil and gas profits after prices soared. It was later raised to 38%.

With the main 40% ring-fenced tax, North Sea producers now face a headline rate of 78%. The levy has a price floor and allowances for investment. The industry says it has driven firms out of the North Sea and cost jobs. Supporters say the profits came from consumers hit by soaring bills, so sharing them back is fair.

Who it affects: Banks profiting from high interest rates