Chancellor Rachel Reeves is weighing 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 profits levy (EPL), introduced in 2022 under Rishi Sunak amid soaring 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 levy early, over growing fears it is stifling capital investment and threatening the UK’s domestic energy output.
Sources close to the discussions said officials have been consulting with major North Sea operators to gauge how much they would reinvest if the tax were removed. The move would mark a dramatic shift for the Labour government, which had previously supported extending the levy but now faces mounting pressure to prioritise growth.
Industry body Offshore Energies UK (OEUK) has warned that the sector is shedding 1,000 jobs a month as a direct consequence of the levy, with investment and production both falling faster than expected. The group has urged the Chancellor to replace the tax with a more stable, long-term fiscal framework, arguing that uncertainty over the levy is driving companies to shift their investment abroad.
The Office for Budget Responsibility (OBR) previously estimated that Ms Reeves’s decision to raise the levy from 75 to 78 per cent and extend it by a year to 2030 would raise about £1 billion. However, it also warned that the move would result in a 25 per cent drop in investment and up to a 9.2 per cent fall in output compared with projections under the previous Conservative regime.
Oil and gas revenues have also come in lower than forecast. The Treasury’s March consultation acknowledged that, while the EPL was initially expected to generate £19 billion by 2030, weaker energy prices and falling output have reduced returns.
Under current rules, ministers can remove the levy once oil and gas prices fall below $71.40 a barrel and 54 pence per therm for at least six months. While gas prices remain higher than their pre-crisis levels, Brent crude has traded below $70 for much of 2025, potentially triggering the conditions for the levy’s withdrawal.
Labour is also expected to unveil a new North Sea energy strategy alongside the Autumn Budget, setting out how the government will support “homegrown energy” and encourage new exploration. Prime Minister Sir Keir Starmer has pledged to “double down” on domestic oil and gas extraction to protect UK energy security and reduce reliance on imports.
The potential tax cut comes amid a worsening economic backdrop. The OBR recently warned that sluggish productivity growth has left the UK economy unable to expand at its previous pace, blowing a hole of more than £20 billion in the public finances.
Ms Reeves is under growing pressure to outline a credible growth strategy that restores business confidence. The Treasury hopes that signalling a more stable investment environment for energy producers could spur capital spending, safeguard jobs, and demonstrate fiscal pragmatism ahead of the Budget.
Any decision will depend heavily on the OBR’s final analysis of whether abolishing the levy would generate sufficient economic returns to offset the short-term loss in revenue. Treasury officials are also exploring whether a permanent variable tax could replace the levy, applying only when prices exceed certain thresholds — a measure intended to balance revenue stability with investor certainty.
Energy firms have cautiously welcomed the prospect of reform. One senior executive said ending the levy early would be “a game-changer” for investment decisions. “The UK has world-class energy resources, but the fiscal environment has been toxic,” they said. “If Labour follows through, it would send a strong signal that Britain is open for energy investment again.”
The Treasury declined to comment on whether changes to the windfall tax will feature in the Budget.
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Labour considers scrapping North Sea windfall tax in dash for growth