Drivers could face more pain at the pumps later this year amid rising speculation that fuel duty could be hiked.
Motorists have already been hit with higher petrol costs due to rising oil prices and geopolitical tensions and with a £22 billion black hole in the public finances to fill, there are rumours that fuel duty is a likely target.
Prime Minister Keir Starmer warned of “tough decisions” to fix the state of the public’s finances earlier this week, cautioning that the Budget would be “painful.”
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He has already ruled out raising income tax, VAT and National Insurance, but said he wouldn’t speculate on the contents of the fiscal update when asked about other charges such as fuel duty.
This has prompted speculation that fuel duty could be increased for the first time in more than a decade when chancellor Rachel Reeves delivers her first Budget in October.
“I have credible intelligence that the Treasury has virtually settled, through its internal economic modelling, on increasing fuel duty by 10p/litre,” says Howard Cox, founder of FairFuelUK.
“For nearly 15 years, I have proven that hiking levies on one of the highest-taxed motorist sectors in the world would damage the economy, jobs, inflation, business investment and freedom of movement.”
What is fuel duty?
Fuel duty is charged on each unit of fuel such as petrol or diesel that you use to fill up your vehicle.
It is a tax that goes back to the government and is expected to have raised £24.7 billion for the state in the latest financial year, according to the Office for Budget Responsibility.
That represents 2.2% of all receipts and is equivalent to £850 per household and 0.9% of national income.
The fuel duty rate depends on the type of fuel but the headline rate on standard petrol and diesel is 52.95 pence per litre.
It has been frozen since 2011-12 and reflects a temporary 5p cut introduced in the 2022/2023 tax year. This has subsequently been extended by previous chancellors to much fanfare and cheers from MPs and motorists (2023/2024 and 2024/2025).
Will fuel duty be raised in the October Budget?
Reeves has warned of tax rises in her October Budget.
Many analysts expect changes to capital gains tax and inheritance tax, but a fuel duty increase is also a likely to be considered, given the threat of electric vehicles to the government’s coffers.
Analysis by wealth manager Evelyn Partners shows a 10p rise in fuel duty, removing the temporary 5p cut and applying a 5p increase, together with VAT, would fill more than 25% of the £22 billion public finance gap by raising £5.5 billion per year.
The cost to a driver filling a 55 litre vehicle would be £6.60 per fill up.
“With the uptake of electric vehicles, fuel duty receipts are declining and will continue to do so,” says Jayne Harrold, tax partner at Evelyn Partners.
“Addressing the looming funding gap with a new solution will be critical for the Government to keep public finances in good shape.”
Another issue is that retailers aren’t passing on the freeze anyway and the Competition and Markets Authority has previously warned motorists are being overcharged.
RAC head of policy Simon Williams says the chancellor has no option but to put fuel duty back up to 58p a litre in October’s Budget.
“She knows the 5p discount is losing the Treasury £2bn a year,” he says.
"She also knows drivers were overcharged by a staggering £1.6bn last year according to the Competition and Markets Authority’s recent report.
“We’d normally be against any increase in duty, but we’ve long been saying drivers haven’t been benefitting from the current discount due to much higher-than-average retailer margins.
“As more and more electric vehicles come on to the roads the government will need to tax drivers differently. We think replacing fuel duty with a pay-per-mile system as soon as possible is the way forward as then the only tax levied on fuel would be VAT. This would give retailers nowhere to hide.”
How to reduce your fuel costs
Drivers face a long wait until 30 October to find out how much fuel duty could be increased, as well as the impact on petrol prices.
However, there are ways to reduce how much petrol you use to keep your fuel costs down.
The RAC suggests driving more efficiently, which may mean checking your tyre pressure, keeping to speed limits and reducing how much you carry in your vehicle.
Another option is switching to an electric car, although high purchase costs and energy prices may limit the savings you can get.
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