The UK’s first female chancellor, Rachel Reeves, confirmed in her budget today that the windfall tax on oil and gas profits will be increased.

The tax, officially called the energy profits levy (EPL), will rise from 35% to 38% from tomorrow. This will bring the headline tax rate on oil and gas activities to 78%.

She also confirmed that the EPL will be extended to 31 March 2030. The previous end date was 2028 but Conservative ministers had planned to extend it to 2029.

Other changes announced in today’s budget include the end of the EPL’s 29% investment allowance, which allowed companies to offset tax from capital that was reinvested. This will be removed for costs incurred after 1 November 2024.

But Rachel Reeve announced she was keeping the 100% first-year capital allowance for EPL. A decarbonisation investment allowance was reduced to 66%.

Money raised from these measures will support the transition to clean energy, the government said.

Tax relief will also be available to oil and gas companies that repurpose equipment for carbon capture usage and storage.

A 25% windfall tax was first introduced by the Conservative government in May 2022 following rising energy prices after Russia’s invasion of Ukraine. The tax rose to 35% from January 2023.

The current government has promised a consultation early next year on how it would respond to price shocks after the end of the EPL and support “long-term stability and predictability” in the oil and gas fiscal regime.

Shares in some offshore producers rose following the announcement. The equity analyst, Jefferies, described it as a “very positive outcome versus most expectations”.

But Friends of the Earth said the budget fell “staggeringly short of what’s needed to address a climate and nature emergency.”

Mike Childs, the organisation’s head of policy, said:

“This budget was the first significant opportunity for the Labour government to demonstrate it will invest to get the UK back on track for meeting our rapidly approaching climate and nature recovery targets. Regrettably, it has largely failed to do so.”

He said “significantly increasing the windfall tax on polluting oil and gas companies – which this budget failed to do – would go a long way to funding the fair, green measures we so desperately need”.

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