Chancellor Rachel Reeves is exploring whether to scrap the windfall tax on North Sea oil and gas producers ahead of schedule as part of efforts to revive economic growth and restore confidence in Britain’s offshore energy sector.
The Energy Profits Levy, which currently imposes an effective tax rate of 78 per cent on North Sea operators, has come under intense scrutiny following warnings from industry that the regime is accelerating the basin’s decline and driving investment overseas. The Treasury has been consulting with major North Sea producers to assess how much additional capital they would commit if the levy were removed earlier than its scheduled 2030 expiry date.
The move would represent a significant policy reversal for the Labour government, which extended the levy by one year and increased it from 75 per cent to 78 per cent last October. That decision was projected by the Office for Budget Responsibility to raise approximately £1 billion but also to trigger a 25 per cent drop in investment and up to a 9.2 per cent fall in output compared with forecasts under the previous Conservative administration.
Industry Faces Mounting Job Losses and Capital Flight
Offshore Energies UK, the sector’s main trade body, has warned that the North Sea is shedding 1,000 jobs monthly as a direct result of the current fiscal regime. The organisation represents more than 450 companies nationwide and has submitted detailed proposals to the Treasury demonstrating how reform could unlock £41 billion of additional investment through 2050, supporting 23,000 jobs by 2030 and generating £12 billion in extra tax receipts.
“The windfall tax is costing jobs and investment and reducing the tax revenues that support families, communities and vital services across the UK,” said David Whitehouse, chief executive of Offshore Energies UK. The organisation has urged ministers to implement a competitive, permanent tax regime from 2026 rather than waiting until 2030.
The warnings have been borne out by company announcements. Harbour Energy, Britain’s largest oil and gas producer, revealed plans in May 2025 to cut 250 jobs in Aberdeen – approximately 25 per cent of its workforce in the city – citing the “punitive fiscal position and challenging regulatory environment”. The company reported an effective tax rate of 111 per cent for the first half of 2025, resulting in a post-tax loss despite making a profit before tax.
Tax Revenue Falls Short of Projections
The levy has consistently underperformed Treasury expectations. The OBR has revised down its forecast EPL revenue from £41.6 billion in November 2022 to just £17.4 billion in its latest outlook covering the period 2022-23 to 2027-28—less than half the original projection.
Government data published in September 2025 showed total UK oil and gas revenues fell to £4.5 billion in financial year 2024-25, down from £6.1 billion the previous year and £9.9 billion in 2022-23 when the levy was first introduced. Energy Profits Levy receipts specifically declined 20 per cent from £3.6 billion to £2.9 billion over the same period.
The shortfall reflects both weaker energy prices and declining production. Brent crude has traded below $70 per barrel for much of 2025, approaching the threshold price of $71.40 that could trigger the levy’s Energy Security Investment Mechanism, which would automatically terminate the tax if prices remain below that level for six months.
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The UK’s reliance on energy imports has reached record levels, with 43.8 per cent of energy used domestically now imported—up 3.4 percentage points from 2023. Gas import dependency stood at 62.6 per cent of supply in the second quarter of 2025. North Sea oil and gas production has dropped by 40 per cent over the past five years and is projected to halve again by 2030 under current policies.
Prime Minister Sir Keir Starmer has pledged to “double down” on domestic oil and gas extraction to protect UK energy security, signalling recognition that homegrown production will remain essential even as the country transitions to renewable energy. The government is expected to unveil a new North Sea energy strategy alongside the autumn budget, setting out how it will support domestic energy production whilst maintaining its commitment not to issue new exploration licences for undeveloped fields.
Industry sources have cautiously welcomed the prospect of early reform. One senior executive told the Telegraph that ending the levy ahead of schedule would be “a game-changer” for investment decisions, adding: “The UK has world-class energy resources, but the fiscal environment has been toxic. If Labour follows through, it would send a strong signal that Britain is open for energy investment again”.
