LONDON: The British government will increase a windfall tax on North Sea oil and gas producers to 38% from 35% and extend the levy by one year, finance minister Rachel Reeves announced on Wednesday.

Presenting the first budget under the new Labour government, Reeves said the increase to the windfall tax, known as the Energy Profits Levy, will take effect on Nov. 1.

It brings the headline tax rate on oil and gas activities to 78%, among the highest in the world. Its duration will be extended by a year to March 2030.

The changes also include scrapping the levy’s 29% investment allowance, which lets companies offset tax from capital that is re-invested.

North Sea producers have warned that the higher tax rate could lead to a sharp drop in investments in the ageing basin.

A 25% windfall tax was first introduced by the previous Conservative government in May 2022 in the wake of soaring energy prices following Russia’s invasion of Ukraine. The tax was subsequently increased to 35% in November 2022, and extended by one year in March 2024.