UK finance minister Rishi Sunak has announced a 25 percent windfall tax on oil and gas producers' profits on Thursday, alongside an $18.9 billion package of support for households struggling to meet soaring energy bills.

The move, which will give each UK household a $500 discount on their energy bill and more for lowest-income households, marks a change of heart for Prime Minister Boris Johnson's government, which had previously resisted windfall taxes, calling them a deterrent to investment.

It is the second emergency policy intervention to help with rising bills this year.

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"We will introduce a temporary and targeted energy profits levy but we have built into the new levy a new investment allowance that means companies will have a new and significant incentive to reinvest their profits," Sunak told parliament. "The more a company invests, the less tax they will pay."

Sunak said it would raise $6.3 billion in the next 12 months and be phased out as oil and gas prices return to normal. He did not set out how the rest of the package would be funded.

He also said there would be a new Investment Allowance that would nearly double the tax relief available for firms on their investments.

On top of the $500 energy bill credit for all households – which replaces an earlier, repayable $250 grant – the government will provide more targeted support for poorer households than before.

More than eight million low-income households will receive an extra $817 cost-of-living grant, with smaller additional sums for all pensioners and the disabled. 

Acute distress

The opposition Labour party, which had been campaigning hard for a windfall tax, said the U-turn showed the Conservative government was motivated by politics rather than a desire to help people. Sunak's announcement came 24 hours after the publication of a scathing civil service report into unlawful parties at the Downing Street residence of Johnson, which led to renewed speculation about the prime minister's position.

"Labour called for a windfall tax because it is the right thing to do, the Conservatives are doing it because they needed a new headline," said Labour's economic policy chief Rachel Reeves.

Inflation reached a 40-year peak of 9 percent in April and is projected to rise further, while government forecasts last month showed living standards were set to see their biggest fall since records began in the late 1950s. 

"The high inflation we are experiencing now is causing acute distress for people in this country. I know they are worried, I know people are struggling," Sunak said, backing the Bank of England to use interest rates to bring the situation under control.

British government bond futures touched a day's low as Sunak spoke, and underperformed modestly against German and U.S. government debt.

"The extra fiscal support for households revealed by the Chancellor today falls short of fully offsetting the reduction to households' real incomes from higher utility prices, but it will cushion the blow and support economic activity," said Paul Dales, chief UK economist at consultancy Capital Economics.

"Overall, this support is much, much needed for millions of households. But it won't relieve all the pain and may mean the Bank of England has to pull the interest rate lever harder to get on top of inflation," he added.