What is fuel duty? Tax cut explained, and new rate per litre - as Rishi Sunak makes Spring Statement 2022

Government levy to be cut by 5p per litre as cost of filling an average family car exceeds £90

Wednesday, 23rd March 2022, 1:46 pm

Chancellor Rishi Sunak has announced an immediate cut in fuel duty as part of Spring Statement.

In his mini-Budget speech on 23 March, Mr Sunak said that the 5p per litre reduction would come into effect from 6pm the same day.

He said the temporary cut, which will remain in place until March 2023, was a “tax cut for hard-working families” as motorists struggle with ever-rising fuel costs.

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Fuel prices have soared in recent weeks as the Russian invasion of Ukraine piled more pressure on the oil industry, where prices were already climbing.

Prices have risen on an almost daily basis in recent weeks (Photo by Finnbarr Webster/Getty Images)

Petrol is now an average of 167.3p per litre and diesel is 179.7p per litre and the Chancellor has been under increasing pressure to make changes to either fuel duty or the rate of VAT charged on fuel.

Mr Sunak said the goverment levy on wholesale fuel prices would be cut from 57.95p per litre to 52.95p per litre. The Treasury says this will amount to savings for drivers of £2.4 billion over the next year.

The Chancellor told MPs: “Today I can announce that for only the second time in 20 years, fuel duty will be cut. Not by one, not even by two, but by 5p per litre. The biggest cut to all fuel duty rates – ever.

“While some have called for the cut to last until August, I have decided it will be in place until March next year – a full 12 months.”

Fuel duty along with VAT currently make up 52% of the forecourt cost of a litre of petrol and 50% diesel. If retailers pass the reduction on to drivers, the 5p per litre cut could reduce the cost of filling an average family car by around £3.

The reduction has been welcomed but described as a “drop in the ocean” by some observers.

RAC head of policy Nicholas Lyes said: “With petrol and diesel prices breaking records, we’re pleased to see the Chancellor has given drivers some much-needed relief. But the reality is that a 5p cut in duty is something of a drop in the ocean. In reality, reducing it by 5p will only take prices back to where they were just over a week ago.

“With the cut taking effect at 6pm tonight drivers will only notice the difference at the pumps once retailers have bought new fuel in at the lower rate. There’s also a very real risk retailers could just absorb some or all of the duty cut themselves by not lowering their prices.

“Temporarily reducing VAT would have been a more progressive way of helping drivers as the tax is applied at the point the fuel is sold, removing any possibility of retailers taking some of the tax cut themselves to increase their profits.”

Rob Morgan, investment analyst at investment firm Charles Stanley, said the cut was “clearly helpful” to motorists but was “not a big move given the huge increase in prices at the pumps over the past couple of months”. He questioned the Treausry claim that the average one-car household would save £100 a year and said the figure was closer to £50 for the average driver.

Fuel duty had been frozen at 57.95p per litre since 2011 but is the single largest element in the price of a litre of fuel, outstripping even the wholesale cost of the product itself.

The Treasury is believed to be facing an impending funding crisis as revenues from fuel duty drop. Experts are predicting that the shift to electric vehicles will leave a £5 billion gap in income by 2028, raising the suggestion that road pricing could be introduced to cover the shortfall.