Excise and environmental taxes are an important part of the UK tax system. They raise substantial revenue for the government while also acting as fiscal tools to influence behaviour, protect public health and support environmental policy. Unlike general consumption taxes such as VAT, excise duties and environmental levies apply to specific goods, services or activities that the government targets for either revenue or regulatory reasons.
For businesses, excise and environmental taxes can present both compliance obligations and strategic challenges. Manufacturers, importers, service providers and retailers across a wide range of industries are affected by these taxes, from fuel and alcohol suppliers to airlines, insurers and soft drinks producers.
What this article is about
This guide provides a comprehensive overview of excise and environmental taxes in the UK. It explains the policy objectives behind these taxes, the framework under which they are administered, and their economic impact. It then examines the main categories of excise and environmental taxes, including fuel duty, alcohol duty, gambling taxes, insurance premium tax (IPT), the Soft Drinks Industry Levy, Air Passenger Duty (APD), and the Climate Change Levy (CCL). Finally, it looks at future trends in green taxation and what businesses should be doing to prepare.
Section A: Understanding Excise and Environmental Taxes
Excise and environmental taxes are levied on particular goods, services and activities. They are distinguished from broad-based taxes such as VAT or Corporation Tax because they are targeted at specific areas that the government wants to regulate, discourage or raise revenue from. The dual function of these taxes – revenue raising and behavioural influence – makes them an important fiscal and regulatory tool.
1. Definition and Purpose
Excise taxes are indirect taxes charged on certain goods, including alcohol, tobacco and fuel. They are usually included in the retail price, so the consumer ultimately bears the cost. Environmental taxes, meanwhile, are designed to reflect the environmental cost of certain activities, such as air travel, energy consumption or the manufacture of sugary drinks.
The purpose of these taxes extends beyond fiscal revenue. While they contribute significantly to the Exchequer, they are also intended to change behaviour. Alcohol and tobacco duties, for example, discourage excessive consumption while raising funds for public services. Air Passenger Duty has an environmental rationale, aiming to reduce emissions by influencing travel behaviour. The Soft Drinks Industry Levy was introduced specifically to address public health concerns about sugar consumption. The Climate Change Levy encourages businesses to reduce energy use and shift towards renewable sources.
2. Legislative and Regulatory Framework
Excise and environmental taxes are introduced and amended through the annual Finance Acts and other specific legislation. HM Revenue & Customs (HMRC) is responsible for the administration and enforcement of these taxes, including setting compliance rules, collecting revenues, and pursuing enforcement actions where necessary.
These taxes often align with international standards and obligations. For example, UK excise duties historically mirrored EU directives prior to Brexit, and environmental taxes often reflect wider commitments under global climate change frameworks. Domestic legislation, however, determines the specific rates and structures applied in the UK.
3. Business and Economic Impact
For businesses, excise and environmental taxes can significantly affect operations and pricing strategies. Importers and manufacturers of alcohol, tobacco, fuel, and soft drinks face substantial compliance obligations, including registration, accurate calculation of duty, timely payment, and detailed record-keeping. Airlines, insurers, energy suppliers and gambling operators are similarly required to manage specialist tax liabilities that directly impact their pricing models.
These taxes also have broader economic implications. Excise duties on fuel, for instance, contribute to transport costs across the economy. Environmental levies can incentivise product reformulation, as seen with soft drinks manufacturers reducing sugar content to avoid higher rates. The Climate Change Levy has driven businesses to adopt more efficient energy practices. Gambling duties shape the way gaming operators structure their offerings and set margins.
Section Summary
Excise and environmental taxes in the UK serve both fiscal and policy goals. They are targeted levies designed not only to raise revenue but also to modify behaviour in areas such as health, environment, and consumption. The regulatory framework places significant obligations on businesses, while the economic effects of these taxes extend across supply chains and consumer markets.
Section B: Core Excise Taxes
The UK’s excise duties are long-established taxes that apply to specific products. They generate substantial revenue for the Exchequer and are central to government policy objectives on health and consumption. The core excise duties are applied to fuel, alcohol and tobacco, with each category having its own structures, rates and compliance obligations.
1. Fuel Duty
Fuel Duty is charged on most hydrocarbon oils and certain bioblends used as motor or heating fuel in the UK. The duty is typically included in the retail price of petrol and diesel. Although widely viewed as a revenue-raising measure, Fuel Duty also has an environmental purpose by discouraging high levels of fossil fuel consumption and encouraging efficiency.
Rates are set by reference to volume (pence per litre), and adjustments are made periodically through the Finance Acts. While successive governments have implemented freezes in Fuel Duty for over a decade, the tax remains a significant source of revenue. For businesses, especially those reliant on transport and logistics, Fuel Duty has a direct bearing on operating costs and profitability.
You can read our extensive guide to Fuel Duty here >>
2. Alcohol Duty
Alcohol Duty applies to the production and import of alcoholic drinks in the UK. The duty is structured by reference to product type (beer, cider, wine, spirits) and alcohol content. In August 2023, a new system was introduced aligning duty rates with alcohol strength, reflecting a policy shift towards encouraging lower-strength products.
Producers, importers and wholesalers must register with HMRC and comply with rigorous accounting and reporting requirements. Alcohol Duty not only contributes to government revenues but also acts as a policy lever to address public health concerns linked to alcohol consumption. For businesses, compliance with the duty regime is integral to pricing, product development and market positioning.
You can read our extensive guide to Alcohol Duty here >>
3. Tobacco Duty
Tobacco Duty is levied on cigarettes, cigars, hand-rolling tobacco and other tobacco products. It is structured with both specific duties (per unit) and ad valorem duties (percentage of retail price). The rates are regularly increased, often above inflation, to reduce affordability and support health objectives.
The compliance burden falls on manufacturers and importers, who must account for duty at the point of release for consumption. The high duty rates mean that tobacco duty fraud, such as smuggling and counterfeiting, is a continuing challenge for HMRC enforcement. For legitimate businesses, the duty has major implications for pricing strategies and demand levels.
A key development is the introduction of a new duty on vaping products, legislated in the Finance Act 2023. This duty will apply from October 2026 and will extend excise obligations to manufacturers and importers of e-liquids and vaping products. Businesses operating in this sector should begin planning for compliance with this future duty.
Section Summary
The UK’s core excise duties – Fuel Duty, Alcohol Duty and Tobacco Duty – raise significant revenues while advancing government objectives on health and the environment. They are tightly regulated, with businesses in affected sectors facing extensive compliance obligations. The economic impact is wide-ranging, affecting prices, supply chains and consumer behaviour. With the forthcoming vaping products duty, the scope of excise taxation is set to broaden further.
You can read our extensive guide to Tobacco Duty here >>
Section C: Wider Excise and Environmental Levies
In addition to the core excise duties on fuel, alcohol and tobacco, the UK tax system includes a range of wider excise and environmental levies. These taxes apply to industries such as gambling, insurance, soft drinks manufacturing, energy supply and air travel. They combine revenue-raising with policy objectives linked to health, consumer protection and environmental sustainability.
1. Gambling Taxes
The UK applies several gambling-related duties to operators. These include Remote Gaming Duty (RGD), General Betting Duty (GBD), and Machine Games Duty (MGD).
- Remote Gaming Duty applies to profits from online gaming, with operators taxed on their gross gambling yield.
- General Betting Duty applies to bookmakers, betting exchanges and pool betting.
- Machine Games Duty applies to gaming machines such as slot machines.
The purpose of these taxes is not only to generate revenue but also to regulate the gambling industry. The duties are set at different rates depending on the form of gambling, and operators must be registered with HMRC. For businesses, gambling taxes represent a significant compliance and financial consideration, affecting pricing, odds, and profitability.
You can read our extensive guide to Gambling Taxes here >>
2. Insurance Premium Tax (IPT)
Insurance Premium Tax is levied on most general insurance premiums, with two rates: a standard rate and a higher rate. Exemptions exist for certain types of insurance, such as life assurance and long-term health insurance.
Insurers are responsible for accounting for IPT and must register with HMRC. The tax is built into the cost of insurance products, meaning it is ultimately borne by consumers and businesses purchasing insurance. For companies, IPT can be a significant cost, especially in sectors with high insurance needs such as transport, construction and manufacturing.
You can read our extensive guide to IPT here >>
3. Soft Drinks Industry Levy
The Soft Drinks Industry Levy (SDIL), often referred to as the “sugar tax,” was introduced in 2018 to encourage manufacturers to reduce the sugar content in soft drinks. The levy is structured in two bands, based on sugar concentration per 100ml. Drinks with higher sugar content face higher charges.
The policy objective is public health, specifically tackling obesity and related conditions. The levy has had a marked impact on the industry, with many manufacturers reformulating products to reduce sugar levels and avoid higher charges. Businesses liable for the levy must register, submit returns, and make payments to HMRC.
You can read our extensive guide to the Soft Drinks Industry Levy here >>
4. Air Passenger Duty (APD)
Air Passenger Duty is a tax charged on passengers departing from UK airports, with rates varying depending on the class of travel and destination distance. Airlines are responsible for collecting the duty and paying it to HMRC.
Since April 2023, APD has operated with three distance bands: Band A (0–2,000 miles), Band B (2,001–5,500 miles), and Band C (over 5,500 miles). Rates also vary between standard and reduced rates (for economy class) and premium rates (for other classes of travel).
The policy purpose of APD is both fiscal and environmental. It raises significant revenue but also acts as an incentive to reduce air travel’s environmental footprint. For airlines, APD is a core factor in ticket pricing and competitiveness, while for businesses and consumers it represents a material component of air travel costs.
You can read our extensive guide to the Air Passenger Duty here >>
5. Climate Change Levy (CCL)
The Climate Change Levy is a tax on business energy use, designed to encourage energy efficiency and reduced emissions. It applies to gas, electricity, coal and other fuels supplied to businesses and public sector organisations. Exemptions and reduced rates apply where energy-intensive businesses have entered into Climate Change Agreements (CCAs) with the government to improve efficiency.
The levy is collected by energy suppliers, who pass the cost on to their business customers. For companies, CCL represents both a financial cost and an incentive to adopt more sustainable energy practices.
Section Summary
The UK’s wider excise and environmental levies – including gambling taxes, Insurance Premium Tax, the Soft Drinks Industry Levy, Air Passenger Duty and the Climate Change Levy – extend beyond traditional excise categories to address consumer protection, public health and environmental goals. They impose compliance obligations on diverse sectors and represent significant cost considerations for businesses and consumers alike.
You can read our extensive guide to the Climate Change Levy here >>
Section D: Future Trends and Policy Direction
Excise and environmental taxes are not static; they evolve in response to government policy priorities, public health objectives, and international environmental commitments. Businesses must therefore monitor legislative changes and anticipate future developments to remain compliant and competitive.
1. Green and Environmental Taxation
The UK government has committed to achieving net zero carbon emissions by 2050. This commitment has a direct bearing on the shape of taxation, with environmental levies expected to play a larger role in future fiscal policy. Measures such as Air Passenger Duty, the Climate Change Levy and the Soft Drinks Industry Levy are examples of how taxation can be used to promote sustainable behaviours.
In future, businesses should anticipate further green tax initiatives, potentially targeting high-carbon industries, waste generation and resource use. The government has already committed to introducing a new excise duty on vaping products from October 2026, and is consulting on reforms to the Plastic Packaging Tax. Environmental taxation will therefore continue to expand in scope and significance.
2. Reform Proposals and Consultations
Excise and environmental duties are regularly reviewed through government consultations. Stakeholders from affected industries, consumer groups and environmental organisations are invited to provide feedback on proposed reforms. Recent consultations have included discussions on restructuring alcohol duty, reviewing Air Passenger Duty bands, and adjusting gambling tax frameworks.
These consultations are an important channel for businesses to influence tax policy. Engaging with them allows organisations to put forward evidence on economic impact, compliance burdens and behavioural responses. While not all proposals are adopted, regular reforms are a feature of excise and environmental taxation and require ongoing attention.
3. Strategic Considerations for Businesses
For businesses, the shifting landscape of excise and environmental taxes means that strategic planning is vital. Compliance systems must be robust enough to deal with frequent changes in duty rates, structures and reporting requirements. Pricing strategies should account for tax liabilities, and where possible, businesses may seek to adapt operations to reduce exposure to higher duty charges.
For example, soft drinks manufacturers that reformulated their products to lower sugar content were able to mitigate the impact of the Soft Drinks Industry Levy. Airlines, insurers, energy suppliers and gambling operators may similarly need to adjust business models to manage future tax changes. Monitoring government policy announcements and industry developments is therefore essential.
Section Summary
The future of excise and environmental taxation will be shaped by environmental goals, public health objectives and regular policy reviews. Businesses must stay alert to reforms, participate in consultations where possible, and plan strategically to manage compliance and minimise costs. With commitments to introduce new duties such as the vaping products levy and adjust existing levies like the Plastic Packaging Tax, adaptability and foresight are crucial for affected sectors.
FAQs
What are excise taxes in the UK?
Excise taxes are indirect taxes levied on specific goods such as alcohol, tobacco and fuel. They are included in the product price, and businesses in relevant sectors are responsible for collecting and remitting them to HMRC.
Which environmental taxes apply to businesses?
Environmental taxes include levies such as the Air Passenger Duty, the Climate Change Levy, and the Soft Drinks Industry Levy. These are designed to encourage environmentally responsible behaviour and raise revenue for government initiatives.
How are excise duties calculated?
Excise duties are usually calculated on the volume of the product (such as litres of fuel or alcohol), or in some cases by weight or strength. Tobacco duty, for example, includes both a per-unit duty and a percentage of retail price.
Do SMEs need to register for environmental levies?
Yes, where applicable. For example, small manufacturers or importers of sugary soft drinks must register for the Soft Drinks Industry Levy, and airlines must account for Air Passenger Duty. Energy suppliers must register for the Climate Change Levy. HMRC provides guidance on registration thresholds and requirements.
How do excise duties affect business costs?
Excise duties often represent a substantial proportion of product costs. Businesses must incorporate these into pricing strategies, supply chain planning and cash flow management. In some sectors, such as transport and manufacturing, excise duties can significantly impact competitiveness and profitability.
Conclusion
Excise and environmental taxes form a key part of the UK’s tax system. They are not only important sources of government revenue but also powerful policy tools used to shape consumer and business behaviour. From fuel and alcohol to gambling, insurance, sugary drinks, air travel and energy use, these taxes target specific activities with fiscal, health and environmental objectives in mind.
For businesses, the compliance obligations associated with excise and environmental taxes can be complex and resource-intensive. Rates and structures are subject to frequent change, requiring close monitoring and robust systems to ensure accurate reporting and payment. Strategic planning is equally important, as these taxes often influence pricing, product development and long-term business models.
Looking ahead, businesses should anticipate further developments in environmental taxation as the UK pursues its net zero goals. New measures such as the vaping products duty (from October 2026) and adjustments to the Plastic Packaging Tax confirm the government’s intent to use taxation as a lever for change. Participating in consultations and staying informed of proposed reforms will be essential to managing future risk and cost exposure.
Section Summary
By treating excise and environmental taxes as both a compliance duty and a strategic factor, businesses can safeguard against penalties, adapt to policy changes, and maintain competitiveness in a shifting tax landscape.
Glossary
| Term | Definition |
|---|---|
| Excise Duty | A tax charged on specific goods such as alcohol, tobacco and fuel, usually included in the retail price. |
| Environmental Tax | A levy designed to encourage environmentally friendly behaviour or discourage activities harmful to the environment. |
| Fuel Duty | A duty charged on most fuels used for vehicles and heating. |
| Alcohol Duty | A duty charged on alcoholic drinks, structured by type and alcohol strength. |
| Tobacco Duty | A duty applied to tobacco products, including cigarettes, cigars and hand-rolling tobacco. A new vaping products duty will apply from October 2026. |
| Gambling Duties | A group of taxes applied to different forms of gambling, including Remote Gaming Duty, General Betting Duty and Machine Games Duty. |
| Insurance Premium Tax (IPT) | A tax on most general insurance premiums, applied at standard and higher rates. |
| Soft Drinks Industry Levy (SDIL) | A levy on soft drinks containing added sugar, introduced to encourage reformulation and reduce sugar consumption. |
| Air Passenger Duty (APD) | A tax charged on passengers departing UK airports, with rates varying by class of travel and distance (three bands since April 2023). |
| Climate Change Levy (CCL) | A tax on business energy use, designed to encourage energy efficiency and reduced emissions. |
| HMRC | HM Revenue & Customs, the UK government department responsible for tax collection and compliance enforcement. |
Useful Links
| Resource | Link |
|---|---|
| HMRC Excise Duty Guidance | gov.uk |
| HMRC Environmental Taxes and Reliefs | gov.uk |
| Fuel Duty Overview | gov.uk |
| Alcohol Duty Rates | gov.uk |
| Tobacco Products Duty | gov.uk |
| Gambling Duties Guidance | gov.uk |
| Insurance Premium Tax (IPT) | gov.uk |
| Soft Drinks Industry Levy | gov.uk |
| Air Passenger Duty | gov.uk |
| Climate Change Levy | gov.uk |
| Plastic Packaging Tax | gov.uk |
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.
