Petrol prices: What is the fuel tax and will it go up?

Woman refueling the car - stock photoImage Source, Getty Images

A possible increase in fuel duty would push petrol prices up by around 12p a liter.

According to the Office for Budget Responsibility (OBR), the increase is expected to begin in April 2023.

How much are fuel taxes expected to rise?

Fuel tax is a tax that motorists pay when they buy fuel such as petrol and diesel.

It may have risen 23% in April, according to the OBR, an independent check of the government’s economic plans.

It said it would be “the largest increase in fuel tax rates in history”.

The 12p-a-litre rise in petrol and diesel prices is expected to bring in an extra tax of around £5.7bn.

Will it continue to increase?

Chancellor of the Exchequer Jeremy Hunt said the government had yet to make a decision to increase fuel duty.

He said it was “not government policy” and the Treasury would “make a decision on this in the next Budget in spring”.

After the fuel tax hike was included in the OBR’s review of the government’s autumn statement, he said: “It’s just an assumption made by the OBR.”

Therefore, it is still possible that the tariffs will be frozen or increased by different amounts.

What happened to fuel taxes in other years?

In theory, fuel taxes should rise every year.

However, Rishi Sunak, then chancellor of the exchequer, used the government’s spring statement in March to cut taxes amid concerns over rising prices.

Fuel duty on petrol and diesel has been reduced by 5p, from 58p to 53p, for 12 months.

The OBR’s statement assumes the 5p rate cut will end in March as planned.

On top of that, it also factored in a scheduled hike of 7p.

However, the chancellor is not always going to go ahead with raising fuel taxes.

The tax had been frozen since 2011 until Mr Sunak reduced it.

What does fuel tax pay for?

Fuel taxes go into general government spending.

And it’s a cash cow, tending to raise around £28bn a year.

The Treasury said the 5p cut introduced in March would cost public funds £2.4bn in 2022/23.

For 2022-23, the OBR expects a total increase of £26.2bn in fuel duties.

There are also questions about how the government will make up the shortfall in tax revenue as more people start driving electric vehicles.

However, the Ministry of Finance will also impose vehicle excise duty on them from 2025.

What happened to gasoline prices?

Gasoline and diesel prices have been on a rollercoaster ride this year.

Recent figures show the average price of petrol in a UK forecourt is 164p a litre.

That’s a few cents below where it was when the fuel tax cut was announced in the spring.

A huge gap has emerged between petrol and diesel, now averaging 188p – about 8p higher than in March.

After fuel tax cuts in March, prices fell slightly – only to spike to record highs in the summer.

Then they pulled back and are currently in a downtrend.

What do gasoline prices have to do with the war in Ukraine?

Fuel prices in the UK vary with the price of crude oil – where crude oil comes from.

They are also affected by the exchange rate between the pound and the dollar, as crude oil is traded in dollars. A weaker pound means fuel is more expensive.

Prices had been rising until Russia invaded Ukraine, but the aftermath made fuel more expensive.

Russia used to be one of the world’s largest oil exporters, but that was before punitive sanctions from the West.

The United States has banned all Russian oil imports. Britain is phasing it out, and EU sanctions will block most of Russia’s oil imports after Dec. 5.

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