Fuel duty is one of the UK’s most significant excise duties, directly affecting the cost of petrol, diesel and other fuels. It plays a dual role in government policy: generating billions in revenue each year while also acting as a lever to influence consumer behaviour and environmental outcomes. Unlike VAT, which applies across a wide range of goods and services, fuel duty is a targeted tax with a long-standing place in the UK’s fiscal and regulatory framework.
What this article is about: This article provides a comprehensive overview of UK fuel duty. It explains what fuel duty is and how it is structured in law (including the Hydrocarbon Oil Duties Act 1979 and Finance Acts), sets out current duty rates and calculation methods, examines reliefs and exemptions available to certain industries, and assesses the wider economic and environmental impact of the tax. Employers, businesses and individuals will gain a clear understanding of their obligations under the fuel duty regime and of its place in the future of UK taxation policy.
Section A: What is Fuel Duty?
Fuel duty is an excise tax levied on most fuels used in vehicles and for heating. It applies primarily to petrol, diesel, biodiesel and biogas, although there are specific exemptions and reliefs for certain uses and fuel types. Unlike VAT, which is a broad-based consumption tax, fuel duty is targeted at energy products and is imposed as a fixed rate per litre (or kilogram for certain gases), regardless of fluctuations in the underlying wholesale price of fuel.
1. Definition and scope of fuel duty in the UK tax system
Fuel duty is a form of excise duty. Excise duties are indirect taxes charged on specific goods such as alcohol, tobacco and fuel. The statutory framework for hydrocarbon oil duties sits primarily in the Hydrocarbon Oil Duties Act 1979 and subsequent Finance Acts, with operational detail set out in HMRC Notices. His Majesty’s Revenue and Customs (HMRC) administers, assesses and enforces the regime.
- Unleaded petrol
- Diesel
- Biodiesel and bioethanol
- Liquefied petroleum gas (LPG) and natural gas used as road fuel (charged by weight)
Electricity for vehicle charging does not fall within the excise duty system and is instead subject to separate VAT and environmental/energy levy rules.
2. Historical background and policy rationale for fuel duty
The UK introduced fuel taxation in the early 20th century to support road infrastructure, with policy objectives evolving over time. Today fuel duty serves three main aims:
- Revenue generation: providing a steady, administratively efficient tax base.
- Environmental policy: signalling the external costs of emissions and congestion.
- Transport management: aligning road usage with infrastructure and societal costs.
In the 1990s, the “fuel duty escalator” increased duty above inflation each year to curb emissions. Although later paused, the environmental rationale remains integral to the modern regime.
3. HMRC’s role in administration and enforcement
HMRC’s responsibilities include publishing technical guidance, registering and supervising producers/importers, operating excise warehouse controls, and carrying out civil/criminal enforcement against non-compliance (including misuse of rebated fuels). Businesses involved in production, storage or importation require authorisation; retailers must reflect correct duty and VAT treatment in pricing and invoicing.
Section A Summary: Fuel duty is a targeted excise tax on motor and heating fuels that serves fiscal and environmental objectives. Its legal basis lies in the Hydrocarbon Oil Duties Act 1979 and Finance Acts, with HMRC responsible for administration and enforcement.
Section B: Fuel Duty Rates and Calculations
Fuel duty is charged as a fixed amount per litre or kilogram, unaffected by wholesale oil price movements. Rates are legislated annually through the Finance Act or by Treasury Orders, with changes announced by the Chancellor during the Budget. The duty is collected at the point of production or import and passed through the supply chain to the consumer.
1. Current UK fuel duty rates
As of the 2025/26 tax year, the main rates are:
- Petrol and diesel: 52.95 pence per litre (main rate)
- Biodiesel and bioethanol: aligned with petrol and diesel rates
- LPG (liquefied petroleum gas): 31.61 pence per kilogram
- Natural gas as road fuel: 24.70 pence per kilogram
Rates have been subject to repeated freezes in recent years, reflecting political and economic sensitivity. Any adjustments are published in HMRC Notice 179 and Treasury rate tables.
2. How fuel duty is calculated and applied at the point of sale
Although liability arises for refiners, importers and warehouse keepers, the tax is built into the retail pump price. The following illustrates the calculation:
- Wholesale fuel cost: £0.60 per litre
- Fuel duty: £0.5295 per litre
- Subtotal: £1.1295 per litre
- VAT (20% applied to subtotal): £0.2259 per litre
- Total pump price: £1.3554 per litre
This demonstrates the compounding effect of VAT being charged on top of fuel duty.
3. Interaction with VAT on fuel and overall pump prices
Fuel duty accounts for a large proportion of pump prices. Because VAT applies to both the duty and the underlying wholesale price, motorists pay tax on tax. For VAT-registered businesses, the VAT element may be reclaimable where fuel is used for taxable business activities, but fuel duty itself is not reclaimable except under limited rebate schemes.
4. Annual Budget announcements and adjustments
Fuel duty policy is reviewed annually. The Chancellor may freeze, increase or reduce the rate as part of the fiscal strategy. Since 2011, successive governments have repeatedly frozen the main rate, prioritising affordability for consumers and businesses. However, the Office for Budget Responsibility (OBR) has flagged the long-term fiscal risk of relying on a tax base that will erode with the growth of electric vehicles.
Section B Summary: Fuel duty is fixed per unit of fuel and significantly influences pump prices due to VAT compounding. Rates are determined through the Budget and remain a focal point of government fiscal and environmental policy.
Section C: Exemptions, Reliefs and Rebates
Although fuel duty applies broadly, there are tightly controlled exemptions and reliefs available to specific sectors. These measures aim to support industries reliant on fuel for non-road purposes while ensuring compliance with environmental and fiscal objectives.
1. Fuel duty reliefs for specific sectors
Examples of current reliefs include:
- Agriculture and horticulture: Rebated diesel (red diesel) may be used in tractors and other off-road machinery.
- Rail transport: Certain locomotives may lawfully use rebated diesel.
- Commercial boats: Fishing vessels and other commercial watercraft are eligible for rebated diesel.
- Aviation: Aviation fuel for commercial aircraft is exempt under international conventions such as the Chicago Convention.
Since April 2022, many sectors — including construction and quarrying — lost eligibility to use red diesel, narrowing reliefs to a small number of permitted industries.
2. Rebates available for businesses, charities and certain industries
Businesses can in limited cases reclaim duty through HMRC schemes where fuel is used for non-road purposes. For example, community transport operators or certain charitable services may claim relief. However, conditions are strict and detailed records are required.
3. The distinction between red diesel and standard fuel duty treatment
Red diesel is chemically identical to standard diesel but is marked with a red dye and chemical markers. This makes it easy for HMRC officers to test and detect misuse. It is charged at a rebated rate and restricted to specified uses only. It is illegal to use red diesel in ordinary road vehicles.
4. Compliance risks and penalties for misuse of rebated fuels
HMRC actively enforces compliance through roadside checks and site inspections. Misuse of rebated fuel is treated as tax evasion and penalties may include:
- Seizure of vehicles or machinery
- Repayment of duty avoided
- Civil penalties and, in some cases, criminal prosecution
Businesses using rebated fuels must keep comprehensive records and ensure fuels are only used within permitted activities.
Section C Summary: Fuel duty reliefs remain tightly restricted after reforms in 2022, covering agriculture, rail, maritime and aviation. Misuse of red diesel or other reliefs attracts significant HMRC enforcement action.
Section D: Fuel Duty and Policy Impact
Fuel duty plays a central role in UK taxation policy. It is a reliable source of government revenue but also serves as a lever to influence consumer behaviour, environmental outcomes and transport use. As the UK moves towards decarbonisation, the sustainability of fuel duty as a tax base is increasingly under scrutiny.
1. Fuel duty as a tool for environmental and transport policy
By raising the cost of petrol and diesel, fuel duty discourages high fuel consumption and supports broader environmental goals. It interacts with other measures such as Vehicle Excise Duty (VED), emissions regulations and subsidies for electric vehicles. However, long-term freezes in the main rate have reduced its effectiveness as a climate policy tool.
2. Revenue contribution of fuel duty to UK public finances
Fuel duty generates billions each year, forming one of the largest excise revenue streams for HM Treasury. The Office for Budget Responsibility (OBR) regularly reports on the significance of fuel duty in supporting public spending. The erosion of this tax base due to the rise of electric vehicles poses a structural challenge for fiscal planning.
3. Economic impact on businesses, supply chains and consumers
Fuel duty affects transport-intensive industries such as logistics, haulage and agriculture. Higher duty increases operating costs and feeds through to supply chains, contributing to inflationary pressures. Consumers also feel the direct effect on household budgets, making duty rates politically sensitive.
4. Future outlook: transition to electric vehicles and potential reforms
The government plans to end the sale of new petrol and diesel cars by 2035. As the market shifts to electric vehicles, fuel duty revenues will decline sharply. Options under consideration include road pricing schemes, mileage-based taxation or levies on vehicle charging. The key challenge will be balancing fiscal sustainability, fairness and environmental goals.
Section D Summary: Fuel duty remains vital for UK revenue and environmental policy but faces long-term reform as electric vehicles replace traditional fuels. Policymakers must identify alternative taxation methods to maintain revenue without undermining net zero targets.
FAQs
How much fuel duty is charged per litre of petrol or diesel?
As of the 2025/26 tax year, the main rate is 52.95 pence per litre for petrol and diesel. This is charged in addition to 20% VAT, which is applied to both the fuel price and the duty.
Is fuel duty the same across the UK?
Yes, standard rates apply across England, Scotland, Wales and Northern Ireland. However, the Rural Fuel Duty Relief Scheme reduces prices in designated remote areas to reflect higher transport costs.
Can businesses reclaim fuel duty?
In most cases, businesses cannot reclaim fuel duty. While VAT may be recoverable, duty itself is only repayable under narrow HMRC relief schemes, such as for non-road fuel uses or certain community transport services.
What is red diesel and why is it taxed differently?
Red diesel is rebated diesel permitted for specific uses such as agriculture, rail and maritime transport. It is dyed red to make detection of misuse straightforward. Using it unlawfully in road vehicles is a criminal offence.
Will fuel duty be replaced as more vehicles go electric?
Yes, reforms are expected as the shift to electric vehicles accelerates. Policymakers are exploring road pricing, mileage-based taxation or charging levies to replace lost revenue from fuel duty.
Conclusion
Fuel duty is one of the UK’s most significant excise taxes, shaping public finances, consumer behaviour and environmental outcomes. It is charged as a fixed duty per litre or kilogram, with VAT applied on top, making it a major component of pump prices. HMRC strictly administers the regime, with serious penalties for misuse of reliefs such as red diesel.
For businesses, fuel duty directly influences operating costs and compliance requirements. For households, it is a visible and politically sensitive expense that affects day-to-day budgets. While successive governments have chosen to freeze duty for over a decade, the long-term fiscal and environmental implications remain pressing.
With the UK committed to phasing out new petrol and diesel vehicles by 2035, fuel duty revenues will inevitably decline. Policymakers must therefore design alternative taxation models to replace this revenue stream while maintaining fairness and supporting the country’s net zero ambitions.
Glossary
| Term | Meaning |
|---|---|
| Fuel Duty | An excise tax charged on most motor and heating fuels in the UK, collected under the Hydrocarbon Oil Duties Act 1979 and Finance Acts. |
| Red Diesel | Diesel fuel taxed at a rebated rate for restricted uses such as agriculture, rail and maritime transport, dyed red to aid enforcement. |
| HMRC | His Majesty’s Revenue and Customs, the UK authority responsible for administering and enforcing excise duty and tax compliance. |
| Excise Duty | A tax imposed on specific goods such as fuel, alcohol and tobacco, separate from VAT. |
| VAT | Value Added Tax, charged at 20% on most goods and services, including fuel, and applied on top of fuel duty. |
| OBR | The Office for Budget Responsibility, an independent body that assesses UK public finances, including forecasts for fuel duty revenue. |
Useful Links
| Resource | Link |
|---|---|
| GOV.UK – Fuel Duty Guidance | https://www.gov.uk/fuel-duty |
| GOV.UK – Excise Duty Guidance | https://www.gov.uk/excise-duty |
| GOV.UK – Fuel Duty Reliefs & Rebates | https://www.gov.uk/guidance/fuel-duty-reliefs |
| GOV.UK – Vehicle Excise Duty (VED) | https://www.gov.uk/vehicle-tax-rate-tables |
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
