Petrol prices: How much a 5p cut in fuel duty saves on filling your tank
Written by Gavin on 22nd March 2022
The cost of living is likely to be at the top of the chancellor’s agenda for the spring statement on Wednesday – but how much of a difference would a 5p cut to fuel duty make?
The average price of petrol has shot up to an all-time high of 165.37p a litre, an increase of more than 55% in the last two years. Diesel has also risen by a similar proportion to 177.47p per litre, according to figures compiled by the government.
As a result, the average tank of fuel now costs almost £90, up by about £33 compared to May 2020. Then, just under two years ago, petrol prices reached a four-year low as the coronavirus pandemic pushed the price of wholesale oil down.
But more recently, wholesale costs have been rising sharply, partly made more extreme by Russia’s war in Ukraine.
How much tax do we pay on vehicle fuel?
A significant proportion of the cost of petrol and diesel goes on tax. Fuel duty is included in the price we pay. It has been frozen at 57.95 pence per litre since 2011.
On top of this, 20% VAT is added to the overall fuel bill.
Will a 5p fuel duty cut make a significant difference?
Clearly, a reduction in duty will help mitigate the rising cost of fuel for drivers – but the question is how much? The table below shows the potential saving if 5p was cut from the fuel duty.
It currently costs £91.87 to fill a 55-litre tank. A 5p cut in the fuel duty is likely to lead to a 6p saving per litre (remember, VAT is paid on fuel duty too) and £3.30 saving per tank.
As the overall price of fuel has gone up, there has also been a proportional rise in VAT.
The government currently earns about 10p more per litre of petrol through VAT than it did in May 2020 – equivalent to about £5.42 extra on the cost of a whole tank.
This means that even after reducing fuel duty by 5p per litre, the government would be taking a little under 4p more from drivers than it was a couple of years ago – £2.12 per tank.
RAC, the car breakdown and insurance firm, welcomed the potential 5p cut in fuel duty, but added the measure “may not be deep enough to make a real difference”.
RAC fuel spokesman Simon Williams said: “Ensuring all drivers fairly and fully benefit from the fuel duty cut depends entirely on retailers reducing their prices and not using it as an opportunity to take a greater profit on every litre they sell.
“On the other hand, reducing VAT, which is a tax on a tax, prevents this from happening and would guarantee drivers benefit fully.“
Will there be a wider benefit?
While drivers are likely to be encouraged by any cut in the price of petrol and diesel, reducing fuel duty could also benefit people who do not own cars.
Higher fuel prices contribute to inflation directly by increasing the cost for businesses to transport goods.
If the chancellor lowers fuel prices and businesses pass on these savings to customers, that could mean smaller increases in the price of food and other items.
However, Mr Sunak is under pressure to do something targeted to help the poorest who are struggling most with the cost of living.
So far the Treasury has rejected the idea of delaying a rise to National Insurance, but Mr Sunak could yet raise the threshold for when people start to pay it, which would help people on the lowest wages.
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