What is road fuel duty?
Excise duty is charged on most hydrocarbon oils. The two main categories of road fuel – unleaded petrol and diesel – are charged duty at 52.95p per litre. When VAT is included, tax represents 49% of the final pump price for petrol, and 46% of the final pump price for diesel (as of May 2022). Fuel duties are estimated to raise £26.2 billion in 2022/23. By comparison duties on all other excisable goods – tobacco products and alcoholic drinks – are set to raise £23.6 billion in this year (Office for Budget Responsibility, Economic and Fiscal Outlook, CP 648, March 2022, Table 3.4).
How has the approach to setting fuel duty changed in recent years?
As the rates of fuel duty are set in expressed in cash terms, they must be increased in line with inflation each year in order to maintain their real value. A commitment to increase the rates of excise duty in real terms each year is often termed a ‘duty escalator’, and over the period 1993-1999 Conservative and Labour governments operated such a policy.
In 1999 the Labour Government suspended the duty escalator, and over the next decade it increased road fuel duties sporadically, often deferring or cancelling proposed changes in duty rates when oil prices were relatively high. In the Labour Government’s 2009 and 2010 Budgets the then Chancellor Alistair Darling proposed re-introducing a duty escalator, but the Coalition Government reversed this approach, initially cutting duty rates by 1p a litre in 2011, and then freezing duty rates for the next four years. The Conservative Government continued to freeze duty rates for the period 2015-2021.
The Office for Budget Responsibility (OBR) has estimated that the cumulative cost of freezing fuel duty rates between 2010/11 and 2021/22, relative to increasing them in line with inflation, to be around £65 billion, after factoring in the expected fall in demand for fuel from higher duty rates (OBR, Economic and Fiscal Outlook, CP545, October 2021, Table A8).
What is the most recent change in fuel duty?
In his Spring Statement on 23 March 2022 the Chancellor Rishi Sunak announced that the rate of duty on petrol and diesel would be cut by 5p per litre for 12 months. This temporary tax cut is forecast to cost £2.4 billion in 2022/23 (HM Treasury, Spring Statement 2022: Fuel Duty Factsheet, 23 March 2022).
Two other Commons Library briefings discuss the application of the duty escalator in the 1990s, and the Labour Government’s decision to rescind it: Taxation of road fuels: the road fuel escalator (1993-2000), and, Taxation of road fuels: policy following the ‘fuel crisis’ (2000-2008).
A third Commons Library briefing looks at trends in the price of petrol and diesel at the pump and before tax, possible reasons for the gap in prices between the two fuels and compares prices and taxes in different countries: Petrol and diesel prices.