The recent increases in gas and electricity prices have been a significant factor contributing to the UK’s spiraling rate of inflation and cost of living crisis. However, since the price of electricity is inextricably linked to the price of wholesale gas on global markets, the last year has witnessed some electricity generating companies reporting extraordinary revenues with minimal impact on their cost base.

Given the ongoing public discussion around excess profits in the corporate sector versus the cost-of-living issues facing households, the Chancellor made a number of further ‘windfall tax’ announcements which will impact the electricity market as explained below. 

Energy Profits Levy

In May 2022, as part of the response to tackling the cost-of-living crisis, the UK Government introduced the Energy Profits Levy which placed an additional 25% tax on the profits of oil and gas producers. Note this levy did not apply to electricity generators. Today, the Chancellor announced the Energy Profits Levy will increase by a further 10% to 35% from 1 January 2023 taking the effective tax rate for oil and gas producers from 65% to 75%. 

Electricity Generator Levy

In addition, from 1 January 2023, the Chancellor has announced a new Electricity Generator Levy will apply to electricity generators who were previously outside the scope of the Energy Profits Levy. This new levy applies in addition to a company’s normal corporation tax charge and will impact corporate groups or single companies generating more than 100GWh of electricity per annum in the UK. Where applicable, electricity generating companies selling electricity at a price above a benchmark £75 per MWh will be subject to a 45% charge on excess receipts above this threshold throughout a qualifying period. A £10m tax free allowance against chargeable receipts applies on a group basis per annum. For these purposes the qualifying period is the accounting period of the reporting company. 

Guidance notes published today make clear that the levy will apply to companies generating electricity from nuclear, renewable (wind & solar) and biomass sources with a few exceptions, notably: 

  • Generation from gas, coal or oil, 
  • Generation under a Contract for Differences, 
  • Pumped storage hydroelectricity or battery storage. 

The levy will apply to revenue from electricity generated in the UK both sold in the UK and exported. It will not apply to electricity generated outside the UK and imported. The levy is not deductible in calculating corporation tax, however, taxpayers will welcome the news that the levy will be reported as part of the corporation tax self-assessment regime and payments will follow the existing corporation tax payment rules. 

The Government has confirmed both the Energy Profits Levy and the Electricity Generation Levy are to be temporary measures and will end on 31 March 2028. As ever, the devil will be in the detail and draft legislation is expected to be published in December 2022.

Get in touch

If you have any questions on the energy tax measures announced in the Autumn Statement, please contact David Nelson of our Tax team. We'd be delighted to hear from you.