Executive Summary
This report explains how UK North Sea oil and gas profits have been taxed, reaching effective rates up to 78%. Taxes like Petroleum Revenue Tax (PRT) and the Supplementary Charge were introduced by Labour governments to ensure public benefit from natural resources, while Conservative governments later reduced or abolished some taxes to encourage investment and protect industry competitiveness. The Energy Profits Levy (windfall tax) introduced in 2022 by Conservatives remains in place as of 2025, with a price floor mechanism for potential suspension. Changes in oil and gas profit taxation do not directly affect consumer prices, while taxes on petrol and diesel, such as Fuel Duty and VAT, do.
1. Introduction
The report explains the background, structure, and political drivers behind the high taxation rates (up to 78%) on UK North Sea oil and gas profits. It clarifies why these taxes were implemented, who introduced them, and how they differ from tariffs like those introduced by the Trump administration.
2. Structure of the 78% Taxation on North Sea Oil and Gas
The 78% tax burden was not a single tax but a combination of three taxes:
| Tax | Rate | Notes |
|---|---|---|
| Corporation Tax | 30% | Corporation tax on "ring-fenced" oil and gas profits |
| Supplementary Charge | 32% | Extra tax introduced in 2002 to capture profits |
| Petroleum Revenue Tax (PRT) | 50% | Tax on fields approved before March 1993 |
Important: PRT was deductible when calculating Corporation Tax, meaning the effective combined tax rate, for fields subject to all three taxes, was around 78%.
3. Timeline of Key Tax Developments
| Year | Event | Government |
| 1975 | PRT introduced | Labour (Harold Wilson) |
| 1993 | PRT abolished for new fields | Conservative (John Major) |
| 2002 | Supplementary Charge introduced at 10% | Labour (Tony Blair, Gordon Brown) |
| 2005 | Supplementary Charge increased to 20% | Labour (Tony Blair) |
| 2011 | Supplementary Charge increased to 32% | Conservative-Liberal Democrat Coalition (David Cameron) |
| 2016 | PRT abolished fully (rate set to zero) | Conservative (David Cameron) |
| 2022 | Energy Profits Levy introduced (25%, later 35%) | Conservative (Boris Johnson, Rishi Sunak) |
4. Reasons for Implementation
1975 (PRT - Labour): Ensure that excessive profits ("economic rent") from the North Sea oil boom benefitted the UK public rather than private companies, following the 1973 Oil Crisis.
2002 (Supplementary Charge - Labour): Windfall tax during high oil prices to capture excessive profits.
2011 (Increased Supplementary Charge - Conservative-Lib Dem Coalition): Reaction to post-financial crisis high oil prices; raised revenue without increasing personal taxes.
2022 (Energy Profits Levy - Conservative): Introduced after the Ukraine conflict caused energy prices to soar; aimed to fund support for households.
5. Comparison with Tariffs (e.g., Trump's US Tariffs)
Tariffs: Taxes on imported goods. Directly raise prices for consumers.
UK Oil and Gas Taxes: Taxes on company profits after sale. Cannot be directly passed on to consumers because global markets set oil prices (e.g., Brent Crude). Profit margins are reduced rather than retail prices increasing.
However, discouragement of investment over time could have indirect long-term effects on supply and prices.
6. Impact of Tax Increases and Reductions on Consumer Prices
Changes in oil and gas profit taxation in the UK—whether increases or reductions—do not directly affect consumer prices because:
Global Pricing: Set internationally, not by UK tax policy.
Profit Margins: Taxes reduce company profits, not sale prices.
Competition: Producers compete globally, limiting any impact of UK-specific taxes on price.
Thus, while tax changes impact profits and revenues, they do not immediately affect consumer energy costs.
6a. Would Reducing Oil and Gas Taxes Lower Consumer Prices?
Reducing oil and gas taxes would increase company profits but would not automatically lead to lower consumer prices. This is because:
Global Market Pricing: Oil and gas prices are determined by international market forces, not by individual company tax rates.
Company Behaviour: Companies are incentivised to retain additional profits rather than lower sale prices.
Supply Chain Pricing: Multiple layers between extraction and retail sales (trading, refining, distribution) mean tax savings at the production level do not filter directly to consumers.
Therefore, reducing oil and gas production taxes would primarily boost corporate profitability without directly benefiting consumers through lower petrol, heating, or electricity prices.
7. Impact of Taxation on Petrol and Diesel Prices
Unlike oil and gas company profits, taxes on petrol and diesel directly affect consumer prices:
Fuel Duty: Fixed amount per litre (currently 52.95p) directly added to the pump price.
VAT: 20% charged on the full pump price including Fuel Duty.
If Fuel Duty rises, pump prices rise immediately. If Fuel Duty falls, prices fall. Changes are directly and visibly passed to consumers.
8. Conclusion
The 78% effective tax rate on North Sea oil and gas profits resulted from layered taxation adjusted by both Labour and Conservative governments, responding to economic and political pressures. Unlike tariffs, these taxes did not directly increase consumer prices but aimed to ensure national benefit from natural resource exploitation.
9. Visual Timeline Summary
1975 (Labour): PRT introduced (50%)
1993 (Conservative): PRT abolished for new fields
2002 (Labour): Supplementary Charge introduced (10%)
2005 (Labour): Supplementary Charge increased (20%)
2011 (Conservative-Lib Dem): Supplementary Charge increased (32%)
2016 (Conservative): PRT abolished (zero)
2022 (Conservative): Energy Profits Levy introduced (25%, later 35%)
10. Sources
UK Parliament research briefings
HM Treasury publications
Office for Budget Responsibility (OBR) reports
Energy UK and Oil & Gas UK industry reports
BBC News and Financial Times coverage (2022-2025)
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