What the Budget gas obligation freeze actually means for you and your pockets

Rachel Reeves today confirmed fuel duty will remain frozen for a 15th consecutive year and a ‘temporary’ 5p cut extended for a further 12 months.

The Chancellor said hiking fuel duty ‘while the cost of living remains high, and with a backdrop of global uncertainty’ would have been the ‘wrong choice for working people’.

That was after plenty of speculation it was on the chopping block – especially given the push towards electric cars.  

The big question is: how much will it save you in annual petrol and diesel bills?

Here’s everything you need to know about the the fuel duty freeze, including how much we pay at the pumps goes direct to government coffers, and how much tax we pay on road fuel compared to the rest of Europe.

What the Chancellor said about fuel duty

Ms Reeves told MPs: ‘Baked into the numbers I inherited from the previous government is an assumption that fuel duty will rise by RPI next year and that the temporary 5p cut will be reversed. 

‘To retain the 5p cut and to freeze fuel duty again would cost over £3billion next year.

‘At a time when the fiscal position is so difficult, I have to be frank with the house that this is a substantial commitment to make.

‘I have concluded that in these difficult circumstances, while the cost of living remains high, and with a backdrop of global uncertainty, increasing fuel duty next year would be the wrong choice for working people.

‘It would mean fuel duty rising by 7p per litre, so I have decided today to freeze fuel duty next year and I will maintain the existing 5p cut for another year too.

‘There will be no higher taxes at the petrol pumps next year.’

More good news for fuel prices…

Included in the Budget document is confirmation that a long-awaiting mandatory ‘Pumpwatch’ scheme will be live by the end of next year, forcing retailers to publish their live pricing to help drivers find the cheapest locations to fill up.

‘The Government will also facilitate competition in the road fuels market, improve transparency and empower drivers to find the cheapest fuel prices by accepting the Competition and Markets Authority’s recommendations to implement Fuel Finder, an open data scheme for fuel prices and a market monitoring function by the end of 2025,’ it said.

By increasing transparency and encouraging competition between forecourts, ministers believe it could reduce pump prices by between 1p and 6p per litre. 

RAC head of policy Simon Williams said: ‘It’s fantastic to see the Government has now said it will introduce the Pumpwatch scheme and fuel price monitoring function by the end of next year as this is something we’ve long been calling for. 

‘This will help drivers get a fairer deal every time they fill up by enabling them to find the cheapest fuel near them and ensuring significant reductions in wholesale fuel prices are passed on to customers at the pumps.’

How much will you save thanks to the fuel duty freeze?

Motoring groups have welcomed the Chancellor’s announcement of fuel duty, with the RAC saying drivers will ‘breathe an enormous sigh of relief’ and AA president Edmund King declaring: ‘In this eve of Halloween budget, the Chancellor has conjured up a treat for drivers.’

But what does the freeze and retention of the 5p cut really mean for you and your outgoing when you fill up at forecourts?

Had Ms Reeves scrapped the 5p cut with immediate effect, the cost of a litre of both petrol and diesel would have increased by 6p, with a further penny added to the bill as a result in higher VAT charged on road fuels.

Today’s (29 October) average unleaded price of 135.3p would have theoretically jumped to 141.32p, while diesel would have risen from 140.3p to 146.3p.

This would have meant an average family car with a 55-litre fuel tank would have cost an additional £3.30 to fill up.

Over the course of a year, based on average mileage of 7,000 miles per annum, drivers could expect to have forked out an extra £48 on fuel receipts over the course of a year.

How much of what we pay at the pumps is tax?

Based on today’s petrol price at 135.3p, fuel duty at 52.95p accounts for almost two fifths (39 per cent) of what drivers pay at the pump.

With VAT at 20 per cent also charged on road fuels, total taxation on petrol amounts to 75.5p – a whopping 56 per cent of the retail price.

For diesel, currently at an average of 140.3p across the UK, fuel duty accounts for 38 per cent of every litre bought, while VAT bumps the tax total to 54 per cent.

Therefore, despite no increase to fuel duty, well over half of what drivers are paying at the pumps goes direct to the Treasury.

In cash terms, that’s around £42 of the £74 total bill every time the tank of an average petrol-powered family car (with a 55-litre tank) is filled up in Britain.

For diesel owners, £42 of an average £77 visit to a forecourt will go into government coffers. 

Britons still pay some of the higher taxes on road fuels

Despite the extension of the 5p-a-litre fuel duty cut, UK drivers are still paying some of the highest taxes on road fuels when compared to neighbouring countries.

Taxation of fuel across Europe is calculated differently to how it is in the UK.

The European Union’s (EU) Energy Taxation Directive requires Member States to levy a minimum excise duty of €0.36 (approximately 30p) per litre on petrol. However, many have much higher rates than this.

A recent report published by Tax Foundation Europe found that only two EU countries charge the absolute minimum duty: Bulgaria and Malta.

At the opposite end of the spectrum, the Netherlands has the highest petrol taxation at €0.79 a litre (approx 66p), followed by Italy at €0.73 (approx 61p).

With fuel duty remaining at 52.95p (converting to €0.63), the UK still has the eighth highest levy on petrol.

As for diesel – which is far less popular on the continent – the EU sets a slightly lower minimum excise duty of €0.33 a litre (approx 28p).

Even with the fuel duty cut, the UK’s taxation on diesel fuel is higher than the rest of Europe.

The next most expensive country is Italy at €0.62 per litre (approx 52p) and Belgium at €0.60 (approx 50p). 

When did drivers first start paying tax on road fuel?

Drivers have been stung with taxation on road fuels for over a century in Britain.

A petrol duty was first introduced as part of the Finance Act 1908 – which was also called the ‘People’s Budget’. It set out a taxation of a thruppence (3d) per gallon.

By 1915, this had doubled to 6d, albeit with a 50 per cent rebate for commercial vehicles.

However, just four years later it was abolished under the Finance Act 1919 in light of the first introduction of vehicle taxation and the tax disc. Unlike Vehicle Excise Duty today, taxation then was calculated in accordance with the horsepower rating of a car.

With the price of fuel declining dramatically in the following years, the Government reintroduced a petrol duty at a rate of 4d per gallon in 1928 and the levy rose gradually as years progressed.

It wasn’t until 1993 under a Conservative Government led by John Major that tax on fuel began to climb at a significant rate.

In the March 1993 Budget, then Chancellor Norman Lamont hiked fuel duty by 10p per litre and introduced a ‘Fuel Price Escalator’ that was initially set at 3 per cent ahead of inflation per year – though that was increased to 5 per cent later the same year.

The escalator was increased to 6 per cent in 1997 under the Tony Blair premiership, with Gordon Brown taking control of the red box.

As the coalition government took power in 2010, the duty on fuel was increased to 58.19p in October and again to 58.95p in January 2011 – the highest it has ever been.

In March 2011, it was announced that the fuel price escalator would be replaced with a ‘Fuel Duty Stabiliser’, along with the level being trimmed back to 57.95p – the same value it remained for 11 years before Rishi Sunak introduced the ‘temporary’ 5p cut in March 2022 to help tackle the cost-of-living crisis.

The aim of the stabiliser was to increase fuel duty if oil prices dropped below $75 a barrel, though it has remained frozen at the same rate for over a decade. 

How much does the Treasury generate from fuel duty? 

Fuel duties already represent a significant source of revenue for the Government.

The OBR says fuel duties levied on purchases of petrol, diesel and a variety of other fuels raise £24.4billion per year for the Treasury.

This estimation is inclusive of the 5p-a-litre cut.

This represents 2.3 per cent of all receipts and is equivalent to £867 per household and 0.9 per cent of national income. 

What does Government spend fuel duty revenue on? 

Combined with Vehicle Excise Duty (road tax), the Treasury generates around £35billion per year from vehicle and fuel taxation.

Around 20 per cent of this is spent on road maintenance budgets, with the rest used for general government expenditure.

The Treasury says revenues from VED and fuel duty goes into the Consolidated Fund – a general pot of tax receipts.

It insists this ‘is being reinvested’ into road schemes.