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Blog Post 26 May 2022

What is a windfall tax and what does it mean for energy bills?

Chancellor Rishi Sunak has outlined a support package to address the cost-of-living crisis, including measures the UK Government will take to help people cope with rising energy bills this winter.

Some of the funding for the support package will come from a windfall tax on energy companies, which should raise around £5 billion over the next year.

Read on to learn what a windfall tax is and how it’s going to help households cope with rising energy bills.

What is a windfall tax?

A ‘windfall tax’ is a one-off tax on companies that have made unexpectedly high profits, usually due to very favourable conditions in the market they’re operating in. It’s usually in place for just one year.

In the context of the current cost-of-living crisis, the one-off windfall tax will be put on energy companies, after some of the biggest players including BP and Shell reported huge increases in their profits due to unusually high oil and gas prices.

The tax will target these companies as they have been lucky to benefit from something that they’re not responsible for – in this case, surging energy prices. We’ve already looked at why energy prices are going up in this blog.

What will the tax be used for?

The windfall tax is expected to raise around £5 billion over the next year. According to the Chancellor, the money will be spent on helping households with higher costs – and particularly energy bills.

Every household in England, Scotland and Wales will get £400 off their energy bills from October, which won’t have to be paid back. This replaces a previously announced £200 discount on bills, which had to be paid back over a period of five years.

Additionally, eight million low-income households who receive Universal Credit, tax credits, pension credit and other means-tested benefits will receive a one-off payment of £650 to help with rising costs. This will be paid in two instalments – one in July and the second later in the autumn.

Support for pensioners will also be increased, as households receiving the Winter Fuel Payment will get an extra one-off payment of £300 in either November or December this year.

For those with disabilities, individuals will receive a one-off payment of £150 from September; if they are also considered to be on a low-income, they could be entitled to the £650 as well.

What else should money from the tax be spent on?

At Energy Saving Trust, we support the windfall tax announced by the Chancellor. We welcome the government’s package of measures to provide direct financial support to those most in need, including low-income and vulnerable households struggling to pay their energy bills.

However, reducing the energy we use in our homes should be a priority, with funding for insulation helping to reduce energy use and costs now and in the future.

Using a windfall tax to improve the energy efficiency of the country’s homes to make them more comfortable places to live and cheaper to heat would help the government tackle both the climate crisis and the cost-of-living crisis.

Last updated: 26 May 2022