What is Fuel Duty? UK Fuel Tax Explained

If you run a business that relies on fuel consumption for its fundamental operation, then fuel duty is one of your biggest costs — but you might not even be aware of it. In this post, we’re going to set out more detail about what fuel duty involves, how it’s calculated, how it’s changed over the years, and how it compares to fuel taxes in other countries.

What fuel duty involves

Fuel duty, technically called Fuel Excise Duty (FED), is a tax taken from all fuel sold in the UK that’s used for motoring or heating. It doesn’t need to be calculated before purchase because the tax is included in the price you pay — standard VAT of 20% follows after, applying to both the original price and the fuel duty itself.

There are two primary purposes justifying the existence of fuel duty. Firstly, it brings in a huge amount of revenue for the maintenance and improvement of road infrastructure (for the 2017-2018 tax year, the most recent for which the figure has been released, fuel duty accounted for a massive 1.3% of national income).

Secondly, it discourages excessive use of fuels (largely fossil fuels). With concerns about the environment and general sustainability growing at a rapid pace, the government will likely continue to look for ways to disincentivise users of petrol and diesel in particular.

How fuel duty is calculated

The rate of fuel duty for each fuel type is determined by the impact of its emissions: the safer the fuel, the less tax will be added to its cost. The table below details the current rates for the different fuel types (the figures will be accurate until March 2020 at the earliest).

Electricity is included for comparison, despite not having any fuel duty applied to it. This presents an interesting budgetary challenge for the years ahead. As technology continues to develop and electric vehicles move further into the mainstream, fuel consumption will inevitably go down, leading to a massive loss of revenue. This is why there will need to be some kind of alternative tax devised to cover the diminished role of fuel duty.

Fuel duty exemptions

As noted, fuel duty is intended to apply to fuel used for motoring or heating, so there are situations in which it doesn’t apply. If you use your fuel to produce electricity in a station, fuel aviation turbines or marine vessels in certain circumstances, or assist with horticultural business, then you may be able to claim relief for the fuel duty you initially paid. To learn more about claiming relief, take a look at this page.

How fuel duty has changed over time

Fuel duty was first levied in the UK in 1908 at a per-gallon rate for petrol that would equate to 1.3p in today’s money. Rates have shifted for petrol and diesel on numerous occasions since then, with one being cheaper or more expensive than the other at different times, but have steadily gone up overall.

In 2008, the rate for each was 50.35p per litre, and it crept up to 58.95p per litre at the start of 2011 — a few months later, it dipped to 57.95p, and has remained at that level ever since (with the latest freeze currently in place until March 2020). With the average price for a litre of petrol in the UK now being around £1.28, the fuel duty works out as about 54% of the overall cost (accounting for over 70% along with the VAT).

Fuel tax in the UK versus other countries

The regular fuel duty rate in the UK is among the highest among EU countries, both for petrol and for diesel, though this doesn’t tell the whole story because the rate isn’t proportional to the cost of fuel (instead being a flat rate applied per litre) so the percentage wavers with fuel costs.

Overall, though, it’s a fair reflection of the steep cost of fuel in this country, since general fuel pricing holds a similarly-lofty position relative to the countries of the EU. Since fuel duty is firmly entrenched for the moment, and is only likely to get worse, the best thing you can do to save your business money is use fuel cards wherever possible and make an effort to save fuel.