Sunak unveils windfall tax on energy firms to fund £15bn package for UK households

Rishi Sunak has announced a £15bn package to help UK households facing a further hike in energy bills this autumn, while completing a major U-turn with a £5bn windfall tax on oil and gas companies to help pay for it.

The chancellor also said he was considering “appropriate steps” to target “extraordinary profits” made by electricity generators. A windfall tax on that sector could bring in a further £3bn-£4bn.

Sunak had long resisted a windfall tax but concluded that the levy was needed to help fund a big package of measures to help all households cope with the cost of living crisis, with a renewed focus on poorer citizens.

The opposition Labour party claimed that Sunak had stolen its ideas. In fact, the chancellor expects to raise more than twice as much as the £2bn proposed by Labour via a windfall tax and he has offered twice as much support to households.

Sunak’s “economic update” — his second mini-Budget in two months — is intended to prove that Prime Minister Boris Johnson’s government is serious about protecting families from soaring energy bills in October.

His package will offset the expected £800 rise in the energy price cap — the average maximum amount paid by a household — in October, when bills are expected to hit £2,800. Domestic energy prices will by then have risen £1,500 in a year.

Sunak has decided to make a £6bn “universal offer” to all households. He replaced a proposed £200 one-off repayable discount to energy bills with a £400 grant, which will not have to be repaid.

But most support went to the poorest, including a £650 one-off cost of living payment to 8mn households already receiving state benefits, at a cost of £5bn.

Pensioners will receive an extra £300 winter fuel payment costing £2.5bn, while disabled people will get a £150 additional cost of living payment costing £1bn. A further £500mn will be available for discretionary grants. Sunak said the most vulnerable households would be £1,200 better off.

Shadow chancellor Rachel Reeves said Labour was “winning the battle of ideas” and Sunak’s U-turn on an energy windfall tax was criticised by Tory rightwingers who want him to start cutting taxes.

Tory cabinet ministers, including business secretary Kwasi Kwarteng, have opposed higher taxes on energy companies and Conservative MP Richard Drax said Sunak was “throwing red meat to socialists”.

Sunak insisted that a “pragmatic and compassionate” Conservative government was obliged to help vulnerable people through a cost of living crisis and he defended levying higher taxes on the energy sector.

He said a Tory chancellor had to be “fiscally responsible” and if more spending was required he had to “fund as much of it as possible in as fair a way as possible”, rather than adding to borrowing and fuelling inflation.

The chancellor added that his 25 per cent “energy profit levy” on oil and gas companies would include a mechanism to incentivise investment. The levy would raise £5bn in the first year and be phased out as oil and gas prices returned to normal, he said.

Sunak also signalled his intention to go beyond Labour’s windfall tax plan, which would apply only to North Sea oil and gas firms, by targeting the excess profits of electricity generators, as revealed this week by the Financial Times.

“We are currently evaluating the scale of these extraordinary profits and appropriate steps to take,” he said. Treasury officials are drawing up a mechanism to target “windfall” profits.

Sunak was forced to bring forward the mini-Budget to alleviate the pain of rising energy bills after his Spring Statement in March was widely criticised for failing to do enough to help the UK’s poorest households.

The chancellor had hoped to wait until later in the summer before announcing the plan, but Tory officials said Johnson insisted on rushing it forward to try to regain some political initiative after the partygate affair.

The chancellor’s energy plan will be followed by what is likely to be another major intervention in the cost of living crisis in his autumn Budget, with Tory MPs clamouring for income tax cuts to be included.

Earlier this month, more than 300 Conservative MPs were ordered by Downing Street to vote against a Labour motion calling for a windfall tax, even though many of them believed a U-turn on the policy was inevitable.