Business & Investment

Fuel Tax Description: What is it and how does it affect gasoline prices?

The Prime Minister’s announcement of a 5 liter fuel cut from 6 pm on Wednesday provides a great opportunity to offer a review course on what it really is.

Rishi Sunak confirmed in a spring statement that the tax per liter of fuel has been reduced from 57.95 liters to 52.95 p as part of efforts to reduce the driver’s record gasoline and diesel price burden.

This is the second fuel tax cut in 20 years (initially March 2011) and lower tariff rates will be maintained until March 2023. The RAC is a regular 55-about £ 3 liter family petrol car.

Here, how much fuel tax contributes to the total cost of gasoline and diesel, how high it is when it is first introduced compared to taxes in other countries, and the levy when the car switches to electricity. I will explain what the future holds for. ..

Prime Minister Rishi Sunak (pictured) cut fuel taxes by 5p in a spring statement.Here’s everything you need to know about fuel taxes

What is a fuel tax?

Fuel tax is an excise tax included in the price paid for each liter of fuel injected into a vehicle.

Prior to the spring statement, the fuel tax for both gasoline and diesel was 57.95 paliters. It has been frozen at the same rate since 2011.

However, it will be reduced to 52.95p from 6 pm tonight to March 2023. This will bring the fuel tax to its lowest level since March 2009 (52.35p).

For alternative fuels, the tariff rate on fuel is calculated in kilograms. For liquefied petroleum gas (LPG), it is 31.61p per kg. In the case of natural gas (biogas, etc.), it is 24.7p per 1kg.

All road fuel tax rates can be adjusted annually by the Minister of Finance.

Why was the fuel tax reduced?

Gasoline and diesel costs have skyrocketed to record highs in recent weeks.

Immediately after Russia invaded Ukraine, supply instability caused oil prices to soar and vestibular prices to rise.

Prices had already risen as the global economy recovered from the coronavirus pandemic, but gasoline rose 18p-a-litre last month alone.

Immediately after Russia invaded Ukraine, supply instability caused crude oil prices to soar and vestibular prices to rise.

Immediately after Russia invaded Ukraine, supply instability caused crude oil prices to soar and vestibular prices to rise.

The prime minister is pressing to avoid the country’s drivers from paying for soaring costs.

Sunak said there will be a 5p-a-litre reduction starting tonight, but RAC warned that drivers may not notice an immediate drop in pump prices.

Nicholas Lyes, Head of Policy for RAC, said:

“When the cut is enabled at 6 pm tonight, drivers will only notice the difference in pumps if the retailer buys new fuel at a lower rate.

“There is also a very real risk that retailers may absorb some or all of their reduced obligations by not lowering prices. If this turns out to be the case. , That would be disastrous for the driver.

“It’s also not entirely unexpected, given that the biggest retailers didn’t cut prices at the end of last year when oil prices plummeted.”

Despite RAC warnings, supermarkets, including Asda and Sainsburys, confirmed that they had reduced vestibular prices by £ 6 per liter on Wednesday night, an additional £ 1 in light of their impact on VAT (). See below for this).

Cuts are welcome, but inferior to the actions taken in other countries. In Ireland, for example, fuel taxes have been reduced by 20 cents (17p) for unleaded gasoline and 15 cents (13p) for diesel.

“The government’s fuel tax announcement is a step in the right direction, but it’s not enough to ease the burden on drivers,” says Gordon Ballmer, Managing Director of the Gasoline Retailers Association.

“Retailers hold tariff-paid inventories that are sold before fuel tax cuts begin. To give drivers immediate discounts on pumps, the Prime Minister cut fuel tax cuts on March 1st. We need to go back to, “he added.

How long has the fuel tax been?

Incredibly, the fuel tax has been around for over a century, and the gasoline tax was first introduced as part of the 1908 Fiscal Act. This was also known as the “People’s Budget.” It set a taxation of thruppence (3d) per gallon.

By 1915, this doubled to 6 days, but commercial vehicles had a 50% rebate.

However, only four years later, it was abolished under the 1919 Fiscal Act, considering the vehicle tax and the initial introduction of tax discs. Unlike today’s automobile tax, the tax is calculated according to the horsepower rating of the vehicle.

Fuel tax increased and reduced since 2001

March 7, 2001: 45.82p per liter

October 1, 2003: 47.10p per liter

December 7, 2006: 48.35p per liter

October 1, 2007: 50.35p per liter

December 1, 2008: 52.35p per liter

April 1, 2009: 54.19p per liter

September 1, 2009: 56.19p per liter

April 1, 2010: 57.19p per liter

October 1, 2010: 58.19p per liter

January 1, 2011: 58.95p per liter

March 23, 2011: 57.95p per liter

March 23, 2022: 52.95p per liter

* Fuel tax will be reduced in bold

Due to the dramatic drop in fuel prices over the next few years, the government reintroduced the gasoline tax at a rate of 4d per gallon in 1928, and the levy gradually increased over the years.

Under the conservative government led by John Major, fuel taxes began to rise significantly in 1993.

In the March 1993 budget, Prime Minister Norman Lamont raised the fuel tax by 10p per liter and introduced a “fuel price escalator” that initially exceeded the annual inflation rate by 3%. Year.

The escalator was raised to 6% under Blair Province in 1997, and Gordon Brown managed the red box.

By the time the coalition government came to power in 2010, tariffs on fuel were raised to 58.19p in October and to 58.95p in January 2011. This is the highest ever.

In March 2011, it was announced that the fuel price escalator would be replaced by a “fuel duty stabilizer” and the level would be reduced to 57.95p. This is the same value as for 11 years.

The purpose of the stabilizer was to raise the fuel tax if oil prices fell below $ 75 a barrel, but it remained frozen at the same rate for more than a decade.

How much does the tax contribute to fuel costs?

With a fixed fuel tax, it’s easy to calculate how much it contributes to the cost of gasoline and diesel purchased in the vestibule.

However, fuel is also affected by VAT, adding 20% ​​to the total cost of the product price and imposing tariffs. This is basically taxation.

Even if gasoline prices reach record highs in recent weeks, the taxation of 57.95 paliters of fuel tax contributes to more than half (51.3%) of the total price of unleaded gasoline (average gasoline on March 21). based on).

What constitutes the cost of 1 liter of fuel? And how much of this is tax?

Despite record high fuel prices, taxes account for half of what we pay for pumps.

With the help of RAC, we have created a breakdown based on the average lead-free price of 167.03 pa-litre on Monday (March 20th).

Before the 5p-a-litre cut, about 35% of the amount paid by the driver is fuel tax.

This is about 3p higher than the current wholesale cost of gasoline, accounting for 55.03p per liter, which is one-third (33 percent) of the total price.

Add the cost of E10 biofuel (11.53p), a retailer margin of 13.17p, and a delivery and oil company margin of about 1.70p to the liter equation, plus a 20% VAT that accounts for 27.65p per liter. To calculate.

Together, the two obligations have recently seen Treasury pockets (about 51%) pumped unleaded in automobile fuel tanks in excess of 85.6p per liter.

Due to the impact of 5p-a-lit fuel tariff reductions, vestibular prices will be about 6p off. That’s about £ 1.61 for a liter of unleaded and £ 1.73 for a diesel.

How much fuel tax does the Treasury generate each year?

Fuel taxes are an important source of income for the government and are, in fact, the fifth largest of all taxes in terms of immigration funds.

Based on 2019/20 figures (which best represent pre-pandemic traffic), the fuel tax has raised £ 28 billion for the Treasury.

That’s 3.3% of all receipts, £ 1,000 per household and 1.2% of national income.

Rishi Sunak said in a spring statement that a 5 liter reduction in fuel tax would require the Treasury to cut £ 2.4 billion over the next 12 months, which would be mitigated by increased VAT revenue.

How much would a driver save if Rishi Sunak reduced fuel taxes by more than 5p-a-litre?

RAC has calculated the potential savings that fuel tax cuts can bring to drivers.

A 5p reduction per liter by the Prime Minister will save drivers £ 3.30 (based on the average price on March 20) when filling family petrol cars with petrol.

Below is a breakdown of the cost savings in the event of greater fuel savings.

What is the government spending on fuel tax revenues?

Combined with VED, the Treasury will generate about £ 35 billion annually from vehicle and fuel taxation.

About 20% of this is spent on road maintenance and the rest is spent on general government spending.

How high is the fuel tax compared to the fuel taxes in other countries?

Currently, 25 of the 27 EU countries (excluding Norway and Switzerland) have lower excise taxes on diesel compared to gasoline, while Belgium, like the UK, is the same for both fuel types. Although it is a tax rate, Slovenia is the only fuel. Members who impose a higher tax rate on diesel than lead-free.

The Netherlands has the highest gasoline tax, at 0.81 euros per liter (about £ 67), which is higher than Italy (0.73 / 61 pounds), Finland (0.72 / 60 pounds) and Greece (0.70 / 58 pounds). UK fuel tax.

The minimum gasoline tax is in Hungary, which is 0.34 euros (28p) per liter.

That said, the UK fuel tax on diesel is one of the highest in the EU.

It is important to note that all EU member states, such as the United Kingdom, impose VAT on gasoline and diesel, although tax rates vary from country to country.

According to RAC Foundation statistics, in terms of overall fuel prices, this means that the Netherlands is the most expensive place to fill with unleaded fuel and Sweden is the most expensive place for diesel.

The UK is ranked 11th and 8th, respectively, compared to the EU countries with the highest fuel prices at the moment (based on average fuel prices at the time of issuance).

But now that the prime minister has cut fuel taxes, there are some moves.

Source: RAC Foundation based on March 20, 2022 pricing

Source: RAC Foundation based on March 20, 2022 pricing

How does the government tax drivers if the car becomes electric and the fuel tax no longer applies?

One of the big problems the prime minister will face in the next few years is the big black in the Treasury vault when electric cars become mainstream, taxing gasoline and diesel, and VED on emissions no longer apply. How to fill the hole.

The most likely solution is to move to a road pricing scheme, where the driver is charged by mileage. This can be tracked using telematics technology.

But both the government and Rishi Sunak have plans for this, or how the tax system works during the period when roads are shared by vehicles with internal combustion engines and more and more battery models. Hardened.

Save money with motoring

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Fuel Tax Description: What is it and how does it affect gasoline prices? Fuel Tax Description: What is it and how does it affect gasoline prices?

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