Labour considers scrapping North Sea windfall tax in dash for growth

Chancellor Rachel Reeves is considering plans to scrap the windfall tax on North Sea oil and gas producers in a bid to boost investment and revive economic growth.

The Energy Profit Levy (EPL), introduced in 2022 under Rishi Sunak amid rising global energy prices, currently imposes an effective tax rate of 78 per cent on North Sea operators. The Treasury is now considering whether to end the tariffs early, due to growing concerns that they stifle capital investment and threaten the UK’s domestic energy production.

Sources close to the discussions said officials were consulting with major North Sea operators to gauge how much they would reinvest if the tax was scrapped. The move would represent a radical shift for the Labor government, which previously supported an extension of the tax but now faces increasing pressure to prioritize growth.

The UK’s offshore industry authority (OEUK) has warned that the sector is shedding 1,000 jobs a month as a direct result of the tax, with investment and production falling faster than expected. The group urged the Finance Minister to replace the tax with a more stable, long-term fiscal framework, arguing that uncertainty over the tax is pushing companies to shift their investments abroad.

The Office for Budget Responsibility (OBR) previously estimated that Ms Reeves’ decision to raise the tax from 75 to 78 per cent and extend it by a year until 2030 would raise around £1 billion. However, it also warned that the move would lead to a 25 percent decline in investment and up to 9.2 percent in output compared to expectations under the previous Conservative regime.

Oil and gas revenues were also lower than expected. A Treasury consultation in March acknowledged that while the EPL was initially expected to generate £19bn by 2030, weak energy prices and falling production had led to lower returns.

Under current rules, ministers can scrap the tax once oil and gas prices have fallen below $71.40 a barrel and 54p/b for at least six months. While gas prices remain above pre-crisis levels, Brent crude has traded below $70 through most of 2025, which could lead to tax-drawback conditions.

Labor is also expected to unveil a new North Sea energy strategy alongside the Autumn Budget, setting out how the government will support “domestic energy” and encourage new exploration. Prime Minister Sir Keir Starmer has pledged to redouble efforts to extract oil and gas domestically to protect the UK’s energy security and reduce reliance on imports.

The potential tax cut comes amid a deteriorating economic backdrop. The Office for Budget Responsibility recently warned that slowing productivity growth has left the UK economy unable to expand at its previous pace, leaving a hole of more than £20 billion in the public finances.

Ms Reeves is under increasing pressure to outline a credible growth strategy that will restore business confidence. The Treasury hopes that signaling a more stable investment environment for energy producers will stimulate capital spending, protect jobs and demonstrate fiscal pragmatism ahead of the Budget.

Any decision will depend largely on the Office for Budget Responsibility’s final analysis of whether eliminating the tax would generate sufficient economic returns to compensate for the short-term loss in revenue. Treasury officials are also exploring whether a permanent variable tax could replace the tax, applied only when prices exceed certain thresholds — a measure aimed at striking a balance between revenue stability and investor certainty.

Energy companies have cautiously welcomed the prospects for reform. One senior executive said that ending the tax early would be a “game changer” for investment decisions. “The UK has world-class energy resources, but the financial environment has been toxic,” they said. “If Labor follows through, it will send a strong signal that Britain is open to investing in energy again.”

The Treasury declined to comment on whether changes to the windfall tax would appear in the Budget.