UK HM Treasury has released a policy paper detailing changes to the Energy Profits Levy (EPL), which involve raising the EPL rate and eliminating the investment allowance.

The Energy (Oil and Gas) Profits Levy (EPL) was introduced in May 2022 to tax the extraordinary profits of oil and gas companies operating in the UK and on the UK Continental Shelf.

The levy is currently set at a rate of 35%, bringing the headline rate of tax on upstream oil and gas activities to 75%. The levy has two investment allowances: the 29% investment allowance and the 80% decarbonisation investment allowance. Capital allowances, including 100% First Year Allowances, are also taken into account in calculating levy profits. The levy is due to expire on 31 March 2029 but will end sooner if oil and gas prices fall to thresholds set out in the Energy Security Investment Mechanism (ESIM).

The government announced that the rate of the Energy Profits Levy will increase to 38% from 1 November 2024, bringing the headline rate of tax on upstream oil and gas activities to 78%.

The period that the levy applies is also being extended to 31 March 2030, which is the end of the financial year in which the current Parliament is due to finish. The Energy Security Investment Mechanism will remain in place, helping to provide operators and their investors with confidence the levy will no longer apply if prices fall consistently to, or below, historically normal levels for a sustained period.

The government will also remove unjustifiably generous investment allowances from the Energy Profits Levy, including by abolishing the levy’s main 29% investment allowance for qualifying expenditure incurred on or after 1 November 2024. Expenditure incurred prior to making the changes on 1 November 2024 will not be affected. As part of this, the government will also reduce the extent to which capital allowance claims (including First Year Allowances) can be taken into account in calculating levy profits.

There are no plans to change the availability of capital allowances in the permanent regime.

The government will retain the decarbonisation investment allowance.

Further details on these changes will be set out at the Budget. Overall, money raised from these measures will support our clean energy transition, increasing security, and providing sustainable jobs for the future.

The government will set out further detail of its approach at the Budget following engagement with stakeholders. All changes will be legislated for in the next Finance Bill.