Katerina Swanson
Fuel duties are levied on purchases of petrol, diesel, and other fuels, and they represent a significant source of revenue for the UK government. In 2023-24, fuel duty tax receipts in the UK amounted to approximately £24.8 billion, a decrease from £25.1 billion in the previous financial year. The transition to electric vehicles (EVs) is expected to significantly impact fuel duty revenues, as EVs are exempt from fuel duty and Vehicle Excise Duty (VED). The UK government is facing the challenge of replacing the £35 billion in tax revenue currently generated by drivers of petrol and diesel cars.
| Characteristics | Values |
|---|---|
| Fuel duty tax receipts in the UK in 2023/24 | £24.8 billion |
| Fuel duty tax receipts in the UK in 2024/25 | £24.4 billion |
| Vehicle Excise Duty (VED) tax receipts in the UK in 2023/24 | £7.8 billion |
| Total tax revenue from fuel duty and VED in the UK in 2023/24 | £32.6 billion |
| Percentage of total UK tax revenue from fuel duty and VED in 2023/24 | 3% |
| Total UK government expenditure in 2023/24 | £1.1 trillion |
| UK government debt in 2023/24 | 103.1% of GDP |
| Fuel duty tax receipts as a percentage of GDP in the UK in 2025/26 | 2.0% |
| Fuel duty tax rate on standard petrol and diesel in the UK | 52.95 pence per litre |
| Fuel duty tax rate on marked gas oil in the UK | 10.18 pence per litre |
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What You'll Learn
Electric vehicles (EVs) and lost revenue
Electric vehicles (EVs) are exempt from fuel duty and Vehicle Excise Duty (road tax). In 2025, the UK government expects fuel duties to raise £24.4 billion, which represents 2.0% of all receipts and is equivalent to £850 per household. This revenue source is under threat as the UK transitions to electric vehicles.
The UK government has an annual tax revenue of around £700 per conventional car on the road. If a driver chooses to buy an EV instead, the government loses around £700 annually in tax revenue per EV. With the growing popularity of EVs, the government is already losing around £30 million per year in tax revenue, and this is only the beginning of the EV transition. By 2050, with an estimated 43 million EVs on the road, the government could lose up to £32 billion each year. This loss of revenue is equivalent to one-third of the UK's public sector spending on education.
The decline in fuel duty revenue is driven primarily by the shift from diesel and petrol cars to electric and hybrid vehicles. For example, diesel fuel duty from 2024/25 was worth £14.9 billion to the Treasury, a decrease of £512 million from the previous financial year. Petrol receipts during the same period showed an increase of £356 million, but this was offset by the loss in diesel revenue. The UK Treasury is facing a potential loss of £35 billion in tax revenue as the sale of new petrol and diesel cars ends between 2030 and 2035.
To address this loss of revenue, one suggestion is to tax the electricity used to charge EVs. However, this solution presents challenges due to the difficulty in differentiating between electricity used for charging EVs and other household electricity use. Another proposed solution is to introduce road pricing, where drivers are charged based on how much, when, and where they drive. While this may be a likely solution, it is complex and potentially unpopular with the public.
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Vehicle Excise Duty (VED)
VED rates are determined by a variety of factors, including the type of vehicle, its environmental performance, and when it was first registered. For instance, vehicles are grouped into bands based on emissions, with the lowest-emitting vehicles (Band A) being exempt from VED, while the highest-emitting vehicles face a higher annual fee. In addition, there is an 'expensive car supplement' for vehicles with a list price of over £40,000, which requires owners to pay an extra charge on top of the standard VED rate. This supplement was introduced in April 2017 and was originally not applied to electric vehicles (EVs) to encourage their adoption. However, as part of broader changes to the road tax system in 2025, EVs will no longer be exempt from this supplement.
VED has faced criticism from some quarters, with arguments that it does not effectively target the external costs of motoring, such as road damage and pollution. The Institute for Fiscal Studies (IFS) think tank has suggested that VED should either be abolished or graduated according to CO2 emissions over the vehicle's life. Additionally, the IFS has argued for the disbandment of the expensive car supplement due to its arbitrary nature and lack of adjustment since its introduction.
The UK government has recognised the need to adapt motoring tax revenues as the country transitions to electric vehicles. The move towards electric cars will result in a significant loss of revenue from fuel duty and VED, which together currently contribute around £35 billion annually. To address this, various alternatives have been proposed, including taxing the electricity used to charge EVs and implementing road pricing mechanisms that charge drivers based on their usage.
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Fuel duty tax receipts in 2023/24
In 2023/24, fuel duty tax receipts in the United Kingdom are expected to amount to approximately £24.83 billion. This figure represents a slight decrease from the previous financial year, during which fuel duty tax receipts totalled £25.1 billion.
Fuel duties are levied on purchases of petrol, diesel, and other types of fuel, such as biodiesel, liquefied petroleum gas, and natural gas used as fuel in vehicles. The rate of duty varies depending on the type of fuel, with the headline rate for standard petrol and diesel set at 52.95 pence per litre, including a temporary 5 pence cut introduced in 2022/23 and extended to 2023/24. This duty rate also applies to biodiesel and bioethanol, while other fuels, such as marked gas oil, liquefied petroleum gas, and natural gas fuel, have lower duty rates.
Fuel duty is included in the price paid for fuel and represents a significant source of revenue for the UK government. According to some sources, fuel duty brings in around £28 billion per year, contributing to a combined total of £35 billion per year when Vehicle Excise Duty (road tax) is included. However, the transition to electric vehicles (EVs) is expected to reduce this revenue stream, as EVs are exempt from both fuel duty and road tax.
To address this impending loss of revenue, various solutions have been proposed, including taxing the electricity used to charge EVs or implementing road pricing schemes that charge drivers based on how much, when, or where they drive. Despite the urgency of the situation, no definitive solution has been implemented as of yet.
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Fuel duty tax receipts in 2024/25
Fuel duty tax receipts in the UK are expected to remain relatively flat in 2024/25 compared to previous years. While the official figures for 2024/25 are not yet available, HM Revenue and Customs data up to 2023/24 shows that fuel duty tax receipts have been relatively stable, with a slight decrease in recent years.
In 2023/24, fuel duty tax receipts in the UK amounted to approximately £24.83 billion, a slight decrease from the £25.1 billion in the previous financial year. This decline is attributed to various factors, including the temporary 5 pence cut in the duty rate per litre of fuel, which was extended to 2024/25, and the increasing adoption of electric vehicles (EVs).
The UK government currently receives a significant portion of its tax revenue from drivers of petrol and diesel cars through fuel duty and Vehicle Excise Duty (VED), also known as road tax. Combined, these sources contribute around £35 billion annually and account for about 4% of all tax revenue. However, with the upcoming ban on the sale of new petrol and diesel cars between 2030 and 2035, the government faces the challenge of replacing this substantial source of income.
To address this issue, various solutions have been proposed, such as taxing the electricity used to charge EVs or implementing road pricing schemes. The Transport Select Committee (TSC) has emphasised the urgency of the situation and recommended that any alternative road pricing mechanism should be revenue-neutral for drivers. The government has acknowledged the need to ensure that motoring tax revenues keep pace with the transition to electric vehicles while maintaining affordability for consumers.
Looking ahead, the Office for Budget Responsibility (OBR) forecasts that fuel duties in 2025/26 are expected to raise £24.4 billion, representing 2.0% of all receipts. This forecast assumes that the duty rates for petrol and diesel will remain frozen at 52.95 pence per litre in 2024/25 and 2025/26, with a planned increase in March 2026.
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Forecasting fuel duty receipts
Step 1: In-Year Estimate
The first step is to generate an in-year estimate for fuel duty receipts in the current year. This estimate is based on the performance of receipts in the year-to-date, considering factors such as developments in the determinants of the tax base and indications from HMRC's receipts monitoring. The in-year estimate serves as the starting point for forecasting receipts growth.
Step 2: Economic Activity, Cost of Driving, and Distance Travelled
The relationship between economic activity, the cost of driving, and distance travelled is a crucial assumption in the forecast. This involves analysing how changes in household income and business activity impact the distances travelled. Domestic consumption and real GDP are used as proxies for household income and business activity, respectively. Additionally, fuel prices and their relationship to crude oil prices, exchange rates, and pump prices are considered.
Step 3: Fuel Efficiency and Electric Vehicle Adoption
The average amount of fuel consumed per kilometre, or fuel efficiency, is another important factor. Forecasts in this area are informed by projections published by the Department for Transport. The increasing adoption of electric vehicles (EVs) is also considered, as they do not generate fuel duty receipts. Assumptions about the proportion of total distance travelled by EVs are made, recognising that their growing presence will impact fuel consumption and, consequently, fuel duty receipts.
Step 4: Tax Base and Government Policy
The tax base and government policies are significant determinants of the fuel duty forecast. This includes considering the government's stated policies on duty rates and their impact on future duty rates. For example, the government has announced plans to increase duty rates by 5p in March 2026, followed by RPI inflation adjustments in April 2026 and subsequent years.
Step 5: Challenge and Refinement Process
The forecasts undergo a rigorous challenge process involving HMRC analysts, the Budget Responsibility Committee, and OBR staff. This process allows for scrutiny and refinement of assumptions before the forecasts are published in the Economic and Fiscal Outlooks (EFOs).
It is worth noting that while fuel duty receipts have remained relatively stable in cash terms, they have declined as a share of GDP due to the effective tax rate falling in real terms. Additionally, the shift towards electric vehicles and the loss of revenue from petrol and diesel vehicles is expected to impact fuel duty receipts significantly, presenting a challenge for the UK government to find alternative revenue streams.
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Frequently asked questions
Fuel tax generates around £24-28 billion in revenue for the UK government.
Fuel duties are levied on purchases of petrol, diesel, and other fuels. The rate depends on the type of fuel—the standard rate for petrol and diesel is 52.95 pence per litre, but this rate has been frozen since 2011-12.
VED generated around £7-8 billion in revenue in the UK during the 2023/24 financial year.
The revenue from fuel duty has remained relatively flat in recent decades but has fallen as a share of GDP due to the effective tax rate falling in real terms. The revenue also decreased during the COVID-19 pandemic due to reduced demand for travel.
As the UK moves towards electric vehicles (EVs), the government faces the loss of £35 billion in fuel tax and VED revenue. EVs are exempt from fuel duty and road tax, so the transition to electric cars will result in a significant reduction in tax revenue for the government.
