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Fuel duties are the second highest indirect tax revenue generator to the UK tax purse after VAT, having contributed as much as 8% to the annual tax revenues received between 2004 and 2014. 

This is therefore an important source of revenue, but has been on a steady decline, contributing closer to 4% (inclusive of VAT) to the total UK tax take over the last four fiscal years. 2024/25 is set to continue this downward trajectory with the government reporting a 1.53% decrease on revenues between April 2024 and August 2024, compared to the same period last year. Given the steady decline, the question of what the government will implement to try to bolster the loss of earnings currently remains unanswered.

Fuel duty has been frozen for more than a decade under the previous government and in 2022 it was cut by 5p per litre, with the cut presently in place until March 2025. The Prime Minister recently refused to rule out a rise in fuel duty in the forthcoming Budget and the 5p cut in fuel duty is expected to be scrapped. Furthermore, the Chancellor ruled out a pay-per-mile road tax as the heir apparent, despite this being a favoured replacement scheme in other countries facing the same issue with dwindling fuel duties.

The historical 5p tax cut does not appear to have been passed onto motorists and the Competition and Markets Authority reported that supermarkets' profit margins on fuel had doubled since 2019. However, it is considered unlikely the same economics will apply to a rise in fuel duties, should this be introduced in the Budget. Perhaps a rise in duties is being used by the government to shape behaviour and help phase out petrol and diesel cars. However, with the recent increase in the energy price cap, it seems unlikely that electricity will be seen as a much cheaper alternative. 

The fuel for electric vehicles (EVs) attracts no duty, aside from the 5% VAT on electricity (which is much less than the 20% VAT charged on top of fuel duty). With the ban on new petrol and diesel cars by 2030 this switch will require seismic changes to the tax system to ensure that the UK is not left with a circa £30bn annual budgetary deficit.

In order to “plug” the fuel duty gap there will have to be changes to the basis of collecting these taxes, with road user pricing apparently off the agenda it begs the question as to what will be implemented. This could be a higher road tax, possibly with a more punitive carbon-based system of taxation whereby “dirty” vehicles, which have a more detrimental effect on air quality, will have to pay a higher amount. Diesel vehicles produce the overwhelming majority of nitrogen oxide gases coming from roadside sources and so they would presumably be taxed at the highest rate band. 

Alternatively (or as well) this could take the form of an increase in toll roads, similar to the M6 toll, Dartford Crossing and/or an increase in congestion charging and clean air zone schemes. 

Whilst an increase in fuel duties may well be implemented in the forthcoming budget, this is likely to be a short-term fix. Declining fuel excise revenues is not restricted to the UK, but common to other countries around the globe. Some have already made changes, for example New Zealand, implementing a road usage charge in addition to petrol excise duty, and Iceland, with material increases in petrol and emissions taxes as well as a general vehicle tax and a new tax imposed on EVs and new road tolls.