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Investors not put off by windfall energy tax

Investors not put off by windfall energy tax
Chancellor Rishi Sunak has announced a new tax on energy companies to pay for a cost of living support package (PRU/AFP via Getty Images)

UK energy companies' share prices were largely unaffected by the announcement of a new energy tax.

BP and Shell saw dips of under 1 per cent after Chancellor Rishi Sunak announced the new tax at lunchtime today, with both companies' shares sitting back at where they opened at the start of the day.

Earlier today (May 26), Sunak announced a raft of measures to assist the UK population with the cost of living crisis.

The £15bn cost of living support package includes a one-off £650 payment to low-income households, a doubling of the discount to energy bills and a £500mn increase to the household support funds.

The package will be funded by the energy profits levy, a 25 per cent tax on the profits of oil and gas companies.

This will be on top of the 40 per cent headline rate of tax on profits already paid by the companies.

At present, the levy does not apply to the electricity generation sector, but the Treasury said the government is consulting with the power generation sector and investors to "drive reforms".

"Certain parts of [the electricity generation sector] have also seen extraordinary profits partly due to record gas prices...the government is consulting to ensure that the price paid for electricity is more reflective of the costs of production.

"Those reforms will take time to implement. In the meantime, the government will urgently evaluate the scale of these extraordinary profits and the appropriate steps to take."

The oil sector was the highest contributor to UK dividends in the first quarter this year, rising 29 per cent according to Link Group's latest dividend monitor.

These groups will not be able to offset previous losses or decommissioning expenditure against profits subject to the levy, however they will be able to participate in a "super-deduction" investment to encourage investment in UK extraction.

The new investment allowance rate is 80 per cent, meaning a near-doubling of the total tax relief on investment, so for every £1 businesses invest they will get an overall tax saving of 91p. 

The levy will be temporary, and Sunak said it will be phased out when gas prices return to “historically normal levels”.

The cost of energy has risen sharply in recent months, and earlier this week energy regulator Ofgem warned that the energy price cap (the average maximum paid by a household) will likely rise to £2,000 when it is reviewed in October.

This would mean household energy bills would have risen by £1,500 in a year.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said the tax is expected to be a “short lived hit” to energy and gas companies.

“It may mean dividends are pushed lower temporarily, but given that tax will reduce if companies invest more, it’s likely to mean an acceleration of investment by BP and Shell, a strategy which will be welcomed by many investors who see environmental progress and not just shareholder pay-outs as crucial for their long term growth prospects,” she said.