UK Extends 78% Oil Tax to Boost Revenue, Jobs, and Energy Security

The UK government has reaffirmed the Energy Profits Levy (EPL), a 78% tax on windfall profits in the oil and gas sector, despite industry pushback. The decision, announced in light of economic and energy security concerns, has been backed by new analysis from Offshore Energies UK (OEUK). Reforming the levy in 2026 is expected to generate an additional £15.7 billion in government revenue over ten years, according to the group.

The proposed changes would increase tax receipts from £32.9 billion to £48.6 billion by sustaining jobs and investment across the offshore energy sector. A key component of the reform includes an estimated £7.5 billion in payroll taxes from retained employment and £6.3 billion in additional corporation tax from oil and gas operators. These benefits are projected to offset any short-term reductions in production tax receipts.

The government has also emphasized the importance of maintaining domestic energy production to support the UK's net zero goals and energy security. OEUK argues that the reform could unlock £50 billion in oil and gas projects and help sustain tens of thousands of jobs in the sector. These projects represent 3.25 billion barrels of reserves and could supply at least half of the UK's oil and gas needs to 2050 from domestic production according to analysis.

Reform Proposals and Economic Impacts

The proposed reforms aim to balance the need for fiscal responsibility with the long-term viability of the UK's oil and gas industry.

By implementing the changes in 2026 instead of delaying them until 2030, the government would see immediate benefits, including £4.6 billion from a new oil and gas price mechanism and wider tax contributions from the UK supply chain. This would not only support essential public services but also reinforce the economic value of homegrown energy according to OEUK analysis.

OEUK's analysis also highlights the risks of delaying reform. If the EPL remains unchanged until 2030, North Sea production is expected to decline by 40% by 2030. This would result in the loss of 1,000 jobs per month and increased reliance on imported energy. With weaker commodity prices already affecting revenue forecasts, the Office for Budget Responsibility (OBR) now projects that production tax receipts will fall from £11.5 billion to £6.7 billion between 2026/27 and 2029/30 according to the OBR forecast.

Industry Response and Future Outlook

Industry leaders and key stakeholders remain divided on the reform proposals. While the government and OEUK emphasize the long-term benefits, many in the oil and gas sector argue that the 78% levy is too high and could discourage investment. They warn that without reform, production will decline faster than expected, leading to reduced tax revenues and economic instability.

David Whitehouse, Chief Executive of OEUK, has reiterated that the proposed changes will unlock immediate investment and support essential services like schools and hospitals. He also stressed that the reform is crucial for the future of the North Sea and the broader UK energy landscape. By securing the offshore energy workforce and supply chain, the government can better support emerging technologies such as offshore wind, carbon storage, and hydrogen projects according to OEUK analysis.

The debate over the Energy Profits Levy is expected to continue as policymakers weigh the immediate financial benefits against the potential long-term impacts on the oil and gas industry. With energy security and net zero goals at the forefront of national policy, the government faces pressure to find a balance that supports both fiscal stability and economic growth.