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Why is tax on petrol and diesel so high?


For every £1 we spend filling up our cars, vans and motorbikes with petrol and diesel, about 60p goes to the government in duty and VAT. But why is fuel tax so high?

Petrol pump in red car

The cost of petrol and diesel may have gone through the roof in recent years, but retailers are not to blame.

That was the conclusion reached last month, by watchdog the Office of Fair Trading's preliminary investigation into the UK's fuel market.

The OFT said that high prices were in fact down to the rising cost of crude oil and, most significantly, the increasingly high taxes imposed by the British government.

60% fuel tax

For every £1 we spend filling up our cars, vans and motorbikes with petrol, about 60p goes to the government in the form of duty and VAT, according to the OFT.

Only 32p in the £1 covers the cost of the crude oil itself, while the remaining 8p represents the profit margins made by retailers.

On a typical litre costing £1.36, that means a tax take of 81p, a crude price of 44p and an 11p margin.

Over the past decade or so, the amount of VAT and duty we pay per litre has risen from 59p in 2004, when a litre cost 80p, and 66p in 2008 when a litre was £1.07.

On diesel, the story is similar.

You can use our handy fuel price calculator so you can work out how much it will cost you to fill up your motor, or our petrol prices tool to find the cheapest fuel near you.

Why is fuel tax so high?

So why is tax on fuel so high?

Governments tend to impose sales taxes for two reasons: to increase revenues, and to reduce consumption.

For example, taxes on tobacco products are very high as there is a good reason to deter smoking given its potential impact on individuals' health and the NHS.

Equally, the government may wish to limit fuel use on environmental grounds and also to reduce congestion.

Taxed to the hilt

The AA's Luke Bosdet says motorists may have been able to cope with past tax increases, which has had the added benefit of resulting in more and more money being pumped into Treasury coffers.

But, Bosdet says the current economic situation means that drivers simply have no more to give.

"The main difference between today and the 1990s, say, is that typical pay packets are not able to absorb the increases in fuel costs," he explains.

"Traffic is down now compared with the period before the credit crunch. Fuel tax used to be a cash cow for the government but now it is a dead horse."

Legacy of the Major years

Bosdet says that today's high tax rate can be traced back to John Major’s Conservative government.

In March 1993, an annual environment tax of "at least 3 per cent above inflation" was introduced on motor fuel.

This was set at 5 per cent above inflation later that year, and continued until it was scrapped by Gordon Brown following the fuel-price protests in 2000.

Bosdet adds: "Labour re-introduced the fuel-duty escalator after the credit crunch to help prop up the public purse. But the coalition made a big play of cancelling it in 2011."

Should government cut fuel duty?

row of petrol pumps

While many people and organisations are calling for lower tax rates on fuel, these would have to be paid for somehow.

Thinktank the Institute of Economic Affairs recently published a report calling for a gradual reduction in fuel duty until it is about half of today's rate.

The IEA said that this could be funded through measures such as road-pricing at peak times on the UK's busiest routes, and the sale of certain motorways and A roads to the private sector.

But new road tolls are unlikely to prove any more popular with the motoring public than fuel tax.

Price spikes the real problem

In fact, Bosdet says, fuel duty in Britain has not increased for almost two years.

The most pressing problem motorists are facing at the moment is volatile crude-oil values.

Spikes in March and October last year pushed up petrol and diesel prices, and forced thousands of drivers off the road, he explains.

Much of this volatility is down to speculation by traders, as well as a weakening in the value of sterling, with oil priced in US dollars.

However, the EU has recently signalled its intent to crack down on this speculation. Earlier this month, European politicians proposed a new transaction tax on all trading in shares and derivatives.

It is hoped that this can go some way towards reducing the damage done by speculators on currencies and commodities such as oil.


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