What is fuel duty?
Everyone has heard of fuel duty. If you drive a car, or even if you don’t drive a car, you would have heard of fuel duty. It crops up every so often in the news or in discussions, often around Budget season when the Chancellor announces their budget.
But, what is it? And, why do we pay it?
In this article, we look at everything to do with fuel duty including what it is, why we have to pay it, and how it will be effected with the rise of electric cars.
What is fuel duty?
Fuel duty is also known as fuel tax, petrol tax or gas tax and is an excise tax imposed on the sale of fuel.
It is the price that we pay for petrol, diesel and other fuels used in vehicles or for heating. So we don’t just pay fuel tax on cars, we also pay for it when we heat our homes. You also pay VAT on this fuel, either 20% for most fuel or 5% on domestic heating fuel. So we don’t pay as much VAT on our heating as we do on our vehicles.
The amount you pay on fuel duty depends on the type of fuel;
- Petrol, diesel, biodiesel, bioethanol
- 57.95 pence a litre
- Liquefied petroleum gas (LPG)
- 31.61 pence a kg
- Natural gas used as fuel in vehicles such as biogas
- 24.70 pence a kg
- Fuel oil burned in a furnace or used for heating
- 10.70 pence a litre
It should be noted that this is correct as of December 2017 and is subject to change. [vc_single_image image=”55284″ img_size=”full”]
Why do we pay fuel duty?
Governments tend to impose sale taxes for two reasons, to increase revenues and to reduce consumption.
It is expected that fuel duty will raise £27.5 billion in 2017-2018 and they may also be trying to deter people from using so much fuel in an attempt to reduce congestion and for environmental reasons.
The high tax rate in the UK can be traced back to John Major’s government when an annual environment tax of “at least 3% above inflation” was introduced on motor fuel. This was then later set at 5% above inflation and continued until it was scrapped by Gordon Brown after protests in 2000. Imagine that, protests on fuel prices. Anyway, it was re-introduced but the price escalation did not return and fuel duty has been frozen since 2011.
As it stands (as of December 2017), we pay 57.95p per litre of fuel plus VAT. This VAT is 20% of the wholesale price plus the duty, this equates to 16.7% of the final price. Therefore, 65% of fuel price actually goes to the exchequer.
Where does fuel duty go?
So where does the money we pay in fuel tax actually go?
It goes the same way as our road tax. Many people think that our fuel duty and our road tax all goes back into our roads but this isn’t technically the case.The tax we pay on things such as fuel and our roads actually goes into one big pot. It is then distributed to various different outlets, our NHS, other public services and some of that money will go to our roads.
But the money we pay on fuel duty does not specifically go to our roads, it simply goes in one big tax pot that is then divided and put into different services so some of it will go to our roads, but not all of it.There are many things that it does go towards, including infrastructure such as tunnel building and new road building as well as local projects. These include road resurfacing or fixing those potholes we all know and hate.[vc_single_image image=”65435″ img_size=”full”]
What is the difference between vehicle excise duty and fuel duty?
We mentioned road tax above, which is also called vehicle excise duty, and is another tax that you have to pay if you drive a vehicle.
It was first introduced in 1888 and is a tax we pay to drive and park on our roads. It was updated in 1920 to apply for motor vehicles specifically.
However, as we said, it doesn’t actually pay for our roads, it goes into one pot and is then distributed across public services. Our roads are funded by the government of course, with the money we pay in fuel duty and vehicle excise duty, but not directly.
The difference between vehicle excise duty and fuel duty is that everyone who puts fuel in their car, or has heating, has to pay for fuel duty. But, not everyone has to pay vehicle excise duty, there are some exceptions including historic vehicles and vehicles used by a disabled person.
Why is fuel tax so expensive in the UK?
Interestingly, we pay the most amount of fuel tax in the UK than any other country in the European Union. This is despite the fact that fuel duty has been frozen since 2011.
Research found that we pay the most for diesel in the UK and pay the second most for petrol with Sweden coming in a close second. Interestingly, though, our fuel prices are some of the cheapest in the UK, but it’s the tax that puts the prices up.
Anyway, we don’t know why fuel tax is so expensive in the UK, but the chances are it is one of the reasons above including an attempt to reduce the amount of vehicles on our roads. If fuel tax is more expensive it might encourage people to car share or take public transport, reducing congestion and decreasing air pollution.
How will electric cars affect fuel duty?
The thing with fuel duty is that you only pay for it if you fill your car up with fuel. Electric cars don’t have fuel and therefore those who drive them don’t pay fuel duty. We know how much money fuel duty brings in, so what will happen when electric cars become even more popular than they are now?
Well it was recently reported that this does pose a financial problem for the government, because every time someone switches to an electric car, the government loses 57.95p a litre every time they fill-up. They will also lose out on that money in VAT, as there is 20% VAT on fuel duty.
There are a few ideas floating around to plug the gap including increasing VAT on energy to 20% or increasing road tax for larger and less fuel-efficient vehicles, even more so than there are now.