5p fuel duty increase in Budget would cost drivers £100 extra a year

Motorists could see their annual household bills rise by ?100 if the Chancellor allows the 5p-a-litre fuel duty cut to expire as part of her plan to plug the Government's ?51billion fiscal black hole in next month's Autumn Budget [1].

Allowing the duty cut to lapse would lead to higher pump prices but also increase distribution costs for road freight operators, which will push up the price of food and energy, the Road Haulage Association warns.

This would trigger a ?7.3billion jump in household living costs between now and 2029, it warned.

The 5p-a-litre cut was introduced in March 2022 by then Chancellor Rishi Sunak as part of a temporary measure to tackle record high fuel costs at the time, which had been triggered by Russia's invasion of Ukraine.

The cut took effect at from 23 March and was initially planned to last for 12 months. However, it has remained in place ever since.

Rachel Reeves opted to extend the 5p-a-litre cut in last October's Autumn Budget, despite calls from campaigners and some economists to hike the tax.

The average household with a car would see their annual bills rise by ?100 if the Chancellor allows the 5p-a-litre fuel duty cut to expire in the Autumn Budget

Richard Smith, managing director at the RHA, said: 'Diesel costs more here than anywhere else in Europe, and over half of every pound at the pump already goes to Government.

'Road freight transport firms keep shops stocked and building sites running, but they've been squeezed in recent years.'

Smith went on to say any increase in fuel duty would be a 'hammer blow' to the road freight industry, which is already being forced to 'operate on tight margins'.

Calculations by the RHA estimated that a 5p increase to fuel duty - from 52.95p currently to 57.95p - would push overall consumer prices higher by 0.3 per cent.

This would come at an annual increase of ?2billion annually for the nation's households.

And while the average car-owning family facing paying around ?100 extra annually next year if the 5p cut was allowed to expire, this would jump to around ?360 by 2029.

Families without a car would still face being hit by ?255 a year in extra costs in four years, the RHA said.

'We're urging the Government to keep fuel duty frozen. At a time when many budgets are stretched thin by cost-of-living pressures, we need to be honest about the real-world impact of fuel duty increases,' Smith said.

The RHA says allowing the 5p fuel duty cut to lapse would lead to higher pump prices and increased distribution costs for road freight operators

Sheena McGuinness, co-head of energy and natural resources at audit, tax, and consulting adviser RSM UK, said HMRC figures published today show fuel duty receipts for April to September at ?12.2billion - down ?26million on the same period last year.

She says the decline is largely attributed to the ongoing transition from diesel to electric and hybrid vehicles, with the fuel duty gap continuing to widen on increased EV uptake.

'With oil prices at their lowest level since early 2021, the Chancellor has a timely opportunity to reverse the 5p fuel duty cut and align rates with the Retail Price Index, leveraging favourable market conditions to strengthen public finances,' she said.

'The OBR has already factored both these aspects into its forecasts, meaning that without implementation, the Chancellor will need to find an additional ?2.7billion from alternative sources.

'As such, it seems highly likely we will see a change to fuel duties in the forthcoming Autumn Budget.'

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The Petrol Retailers Association (PRA) also urged the Chancellor to both freeze fuel duty and permanently retain the 5p-per-litre rebate on the back of Office of National Statistics data released this week showing that inflation remains high at 3.8 per cent in September, unchanged from August - almost double that of the Government's 2 per cent target.

And high fuel prices was one of the key drivers of inflation cited by the ONS.

This exceeds the Government's 2 per cent target.

The ONS has cited fuel prices as one of the key drivers of inflation.

Gordon Balmer, executive director of the PRA, said: 'Forecourts are doing all they can to keep prices as low as possible, despite economic pressures.

'With inflation [2] putting pressure on business, the last thing we need is a rise in fuel duty. We urge the Chancellor to commit to a full freeze on fuel duty and make the 5p-per-litre rebate permanent in the upcoming Budget.'

In response to the RHA's statement, an HM Treasury spokesperson told the Daily Mail and This is Money: 'The Chancellor has been clear that at Budget she will strike the right balance between making sure that we have enough money to fund our public services, whilst also ensuring that we can bring growth and investment to businesses.'

They added: 'The Chancellor decides tax policy at fiscal events.

'We do not comment on speculation around changes to tax outside of fiscal events.'

When confirming the extension to the fuel duty cut for another 12 months in last year's Budget, Ms Reeves said axing it would be the 'wrong choice'.

The Chancellor told Parliament in October: 'To retain the 5p cut and to freeze fuel duty again would cost over ?3billion next year.

'At a time when the fiscal position is so difficult, I have to be frank with the House that this is a substantial commitment to make.

'I have concluded that in these difficult circumstances - while the cost of living remains high and with a backdrop of global uncertainty - increasing fuel duty next year would be the wrong choice for working people.

'It would mean fuel duty rising by 7p per litre. So, I have today decided to freeze fuel duty next year and I will maintain the existing 5p cut for another year, too.

There will be no higher taxes at the petrol pumps next year.'

Rachel Reeves opted to extend the 5p-a-litre cut in last October's Autumn Budget, despite calls from campaigners and some economists to hike the tax

Former Institute for Fiscal Studies director Paul Johnson criticised the move, saying: 'Almost unbelievably this Government has followed the practice of its predecessor in freezing rates of fuel duties and not allowing the 'temporary' 5p cut to expire, while raising other taxes dramatically and claiming to be focused on tackling climate change.'

And the Chancellor will again need to decide whether the fuel duty freeze - in place since 2011 - will be retained moving forward.

The Government is set to lose ?15billion in motoring tax revenue by 2029 if fuel duty remains frozen, the independent fiscal watchdog has calculated.

The combined saving of the 15-year freeze on taxation on petrol and diesel - combined with the 5p cut since 2022 - has resulted in approximately ?90billion in lost revenue for the Treasury.

Ms Reeves could announce changes to taxation on electric cars in the Autumn Budget.

Ministers are expected to make a decision about the Expensive Car Tax currently levied on EVs

Could EVs be targeted in the Budget?

Reeves next month could potentially take aim at electric vehicles with higher taxation, as she did in the Spring Statement in March.

Earlier this year, the Chancellor saw in a Tory policy that requires owners of electric cars to pay vehicle excise duty (VED)[3] - or car tax - for the very first time.

And in an added blow, many of this year's EV buyers are also due to be stung by a ?425-a-year Expensive Car Supplement (ECS).

The ECS is levied on any new model priced at ?40,000 and above.

It means owners of ?40k-plus EVs registered after 1 April 2025 will have the ECS applied for five years in addition to the ?195 VED standard rate (paid from the second year) - taking the total annual payout to ?620 or ?3,100 over the half-decade period.

However, in a leaked letter seen by the Daily Mail in May [4], Roads Minister Lilian Greenwood suggested the ?40,000 threshold could be raised - or even axed entirely - for EVs 'to make it easier to buy electric cars' in a decision that could be confirmed next months.

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Ministers are also facing growing pressure to introduce new levies on EVs to fill the void in fuel taxation left by the transition away from combustion engine cars.

The Treasury receives almost ?25billion per year from fuel duty, though this will decline dramatically from 2030 when the ban on sales of new petrol and diesel cars is scheduled to be introduced.

As such, the Government is said to be considering several alternative proposals, including a tax on the weight of cars or a pay-per-mile system.

Amidst concerns that new levies could stall demand for EVs, reports have suggested that Ministers are mulling an increase to discounts on prices supplied through the tax-payer funded Electric Car Grant [5], which was only launched this summer.

References

^ Autumn Budget (www.thisismoney.co.uk)
^ inflation (www.thisismoney.co.uk)
^ requires owners of electric cars to pay vehicle excise duty (VED) (www.thisismoney.co.uk)
^ leaked letter seen by the Daily Mail in May (www.thisismoney.co.uk)
^ discounts on prices supplied through the tax-payer funded Electric Car Grant (www.thisismoney.co.uk)