Government announces cost of living package funded partly by windfall tax

The Chancellor set out a package of measures to address the cost of living crisis on 26 May 2022, to be funded in part by a 25% windfall tax on the profits of oil and gas companies¹. The plan scraps the one-off £200 loan that was to be deducted from energy bills and replaces it with a £400 grant that does not have to be repaid¹. The package is worth £15bn².

The measures include a one-off £650 cost of living payment for 8 million of the lowest income households, paid in two lump sums in July and the autumn; a one-off £300 pensioner cost of living payment for 8 million households in receipt of the winter fuel payment, paid in the autumn; and a one-off £150 disability cost of living payment for the six million people in receipt of non-means tested disability benefits, paid from September². The £300 pensioner payment is an increase from £150¹. The new measures will see a third of households in the UK and Northern Ireland supported².

Up to £5bn will be funded by a windfall tax on the profits of gas and oil firms². A temporary Energy Profits Levy will tax oil and gas businesses at a rate of 25%², increasing the rate paid by North Sea producers from 40% to 65%³. A new investment allowance offers 90% tax relief for businesses reinvesting profits², which the Financial Times reported would mean companies receiving an overall 91p tax saving for every pound they invest³. The levy will come into effect immediately and could be in place to the end of December 2025, when a sunset clause will end the tax³. Electricity generators will face reforms and possibly a similar levy on profits²; the Times reported that the Chancellor was preparing to impose a windfall tax on electricity firms within weeks, raising in the region of the low digit billions³.

The Association for Renewable Energy and Clean Technology (REA) welcomed the measures but said they would only provide temporary relief. Its chief executive, Dr Nina Skorupska CBE, said:

"The Government needs to go much further and, in addition to short term cash, lead a national effort to ensure as many households as possible can insulate their homes and install domestic renewables and clean technology before the winter. This will improve energy efficiency, reduce demand for expensive fossil fuels and prevent damaging exposure to volatile global prices."

Ofgem said on Tuesday that the energy price cap would increase to £2,800 in October, an increase of £800, after the regulator already increased it by £693 in April¹. Ofgem warned some 12 million homes would fall into fuel poverty without meaningful intervention². The CIPHE said the number of fuel poor had doubled since April².

Why it matters for households

The £400 grant is applied by energy suppliers to each household they supply electricity to, over six months from October 2022, and does not need to be paid back⁴. Households do not need to apply or sign up⁴. The monthly amounts are £66 in October and November 2022, then £67 a month from December 2022 to March 2023⁴. How the discount arrives depends on payment method: monthly Direct Debit customers receive it as a refund to their bank account after the Direct Debit is collected; credit or payment card customers see it applied to their energy account in the first week of each month; smart prepayment meter customers have it applied to the meter in the first week of each month; and traditional prepayment meter customers receive vouchers by email or post to take to a PayPoint outlet⁴. The additional support measures are delivered via the UK Government and not energy suppliers⁴.

For a household's energy independence, the package is cash support against a rising price cap rather than a reduction in the amount of energy a home needs. The REA's position is that insulation and domestic renewables would reduce demand for expensive fossil fuels and exposure to volatile global prices¹. The removal of VAT on domestic renewable and clean technologies was part of the REA's six point plan and was introduced in the Chancellor's Spring Statement in March¹. The CIPHE said installers have a role in helping customers get the best efficiencies out of heating and plumbing systems, from boiler settings to upgrading controls².

What happens next

The £400 discount is applied over six months from October 2022⁴. The £650 payment is paid in two lump sums in July and the autumn². The £300 pensioner payment is paid in the autumn². The £150 disability payment is paid from September². The Energy Profits Levy comes into effect immediately and could remain in place to the end of December 2025, when a sunset clause will end the tax, and will only be phased out if oil and gas prices return to historically more levels³. The Times reported that the Chancellor was preparing to impose a windfall tax on electricity firms within weeks³.

Sources4 cited

1. REA welcome short-term relief – ‘national effort’ now needed to install renewables and insulate homes - REA, r-e-a.net
2. Billions pledged in energy bill cuts | CIPHE, ciphe.org.uk
3. Sunak U-turns on ‘energy profits levy’ in £15bn cost of living package - Carbon Brief, carbonbrief.org
4. Important update on the cost of living crisis | Gas and Electricity Company | ScottishPower, scottishpower.co.uk