Please note the charts on this page have not been updated for March 2021 forecast due to a software issue. We will endeavour to update them as soon as possible.

Fuel duties are levied on purchases of petrol, diesel and a variety of other fuels. They represent a significant source of revenue for government. In 2019-20 fuel duty raised £28 billion. That represented 3.3 per cent of all receipts and was equivalent to £1,000 per household and 1.2 per cent of national income.

Fuel duty is levied per unit of fuel purchased and is included in the price paid for petrol, diesel and other fuels used in vehicles or for heating. The rate depends on the type of fuel:

  • the headline rate on standard petrol and diesel has been frozen since 2011-12 at 57.95 pence per litre. This also applies to biodiesel and bioethanol;
  • the rate on liquefied petroleum gas is 31.61 pence per kilogram;
  • the rate on natural gas used as fuel in vehicles (e.g. biogas) is 24.70 pence per kilogram; and
  • the rate on ‘fuel oil’ burned in a furnace or used for heating is 10.70 pence per litre.

VAT is applied after fuel duty, so, for example, the pump price of a litre of petrol currently reflects the pre-tax price plus 57.95p for fuel duty plus 20 per cent VAT on the pre-tax price and a further 11.59p for VAT at 20 per cent on fuel duty.

  Forecast methodology

Forecast process

The OBR commissions forecasts of fuel duty receipts from HM Customs & Revenue (HMRC) for each fiscal event. The forecasts start by generating an in-year estimate for receipts in the current year, then uses a model to forecast growth in receipts from that starting point. We provide HMRC with economic forecasts that are used to generate the tax forecasts. These are scrutinised in a challenge process that typically involves two rounds of meetings where HMRC analysts present forecasts to the Budget Responsibility Committee (BRC) and OBR staff. This process allows the BRC to refine the assumptions and judgements that underpin the forecasts before they are published in our Economic and fiscal outlooks (EFOs).

Forecasting models

Road fuel duty receipts are estimated by multiplying taxable fuel consumption – known as ‘fuel clearances’ – by the corresponding duty rate.

Our fuel clearances forecast involves two steps:

    • we forecast total distances that will be travelled. This uses an econometric model that relates distances travelled to domestic consumption (petrol) and real GDP (diesel) and the real price per kilometre travelled. That real price reflects our forecasts for pump prices, which in turn reflect assumptions about the dollar oil price, the sterling/dollar exchange rate and how changes in crude oil prices are fed through to pump prices; and
    • we make assumptions about trends in fuel efficiency to derive the total amount of fuel consumed to travel the number of miles we forecast. We allow for greater use of partly electric (hybrids) and fully electric vehicles over the forecast period.

The Government sets out policy assumptions for the uprating of fuel duty each year. Petrol and diesel duty rates are set to rise in line with RPI inflation from April 2020. The cash increase in receipts over the forecast period is more than explained by this rise in duty rates.

Duties on other types of fuel such as heating oil raise small amounts. They are forecast based on simple assumptions derived from historical growth rates.

Main forecast determinants

The main determinants of our fuel duty forecast are those related to the tax base and those that are used by the Government in setting parameters of the tax system. See the ready reckoners section below for more information on the effects of these determinants on fuel duty receipts.

Domestic consumption (petrol)

Real GDP (diesel)

Oil price (denominated in pounds)

Inflation (RPI)

Main forecast judgements

The most important judgements in our fuel duty forecast are related to the economy forecast that underpins it – the most important being domestic consumption (petrol) and real GDP (diesel) and hence the underlying demand for fuel in the economy. Alongside those, we need to make several other forecast judgements. These include:

    • In-year estimate – our estimate for fuel duty receipts in the current year is determined by performance of receipts in the year-to-date, developments in determinants of the tax base and any other indications from HMRC’s receipts monitoring. The in-year estimate determines the starting point from which we use our model to forecast receipts growth;
    • The relationship between economic activity, the cost of driving and distance travelled – the extent to which distances travelled are affected by changes in household income and business activity (which are proxied by domestic consumption) and fuel prices is an important assumption in the forecast. We estimate these relationships based on historical data; and
    • Fuel efficiency – the average amount of fuel consumed to travel a kilometre determines the amount of fuel that will be bought for a given distance travelled. We forecast average fuel efficiency in line with historical trends. We also allow for greater use of partly electric and fully electric vehicles over the forecast period.

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  Previous forecasts

Although fuel duties have been significantly lower than many of our earlier forecasts, this mainly reflects a series of policy decisions to freeze or cut rates. Budget 2011 announced both a cut in the duty rate and the cancellation of previously announced above inflation rises. The main rate of fuel duty has been frozen since then. The policy section below sets out how fuel duty policy has been changed at many of the Budgets and Autumn Statements since 2010.

The coronavirus outbreak and the public health measures taken to contain it has led to a significant decline in economic activity and travel, and hence receipts in 2020-21 are set to be significantly weaker than in recent forecasts.

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  Policy measures

Since our first forecast in June 2010, governments have announced a number of policy measures affecting our forecast for fuel duty. A large number of these policies are related to the cutting or freezing the main duty rate. The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Annex A of the relevant Economic and fiscal outlook.

Fuel duty policy has been changed at most Budgets and Autumn Statements since 2010, with previously planned rises repeatedly postponed or cancelled. Specifically:

    • in Budget 2011, the Government cancelled the pre-existing fuel duty escalator (where fuel duty rates were due to rise in line with RPI inflation plus a penny a litre in every year until 2014-15). The rate was also cut by one pence a litre in April 2011. The April 2011 RPI rise was delayed until January 2012 and the April 2012 rise was delayed until August 2012;
    • in Autumn Statement 2011, it delayed the planned January 2012 RPI rise until August 2012– thereby planning a rise before the next Autumn Statement;
    • in June 2012, it delayed the planned August 2012 RPI rise until January 2013;
    • in Autumn Statement 2012, it cancelled the planned January 2013 RPI rise and pushed back each subsequent year’s April RPI rises until the end of the Parliament to September;
    • in Budget 2013, it cancelled the planned September 2013 RPI rise;
    • in Autumn 2014, it cancelled the planned September 2014 RPI rise;
    • in Budget 2015, it cancelled the planned September 2015 RPI rise;
    • in Budget 2016, it cancelled the planned April 2016 RPI rise;
    • in Autumn Statement 2016, the Government cancelled the planned April 2017 RPI rise;
    • in Autumn Budget 2017, the Government cancelled the planned April 2018 RPI rise;
    • in Autumn Budget 2018, the Government cancelled the planned April 2019 RPI rise; and
    • in Spring Budget 2020, the Government cancelled the planned April 2020 RPI rise.
    • in Spring Budget 2021, the Government cancelled the planned April 2021 RPI rise.

These successive policy changes are something to note when considering our fuel duty receipts forecast. Parliament has stipulated that our forecasts be based on the Government’s stated policies and that we must not consider alternatives. The Government states that fuel duty will be uprated by RPI inflation in the future, but has not done so in the past decade. Parliament also requires us to note risks to our forecast: the possibility that the actual path of fuel duty rates policy will differ from the Government’s current stated policy is a risk that we have noted in successive forecasts.

Budget 2020 announced a measure to restrict the eligibility to use cheaper ‘red diesel’, so requiring more users to pay the higher main rate of duty. This is expected to raise around £1.3 billion a year from 2022-23.

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  Ready reckoners

‘Ready reckoners’ show how our fiscal forecasts could be affected by changes in selected economic determinants. They are stylised quantifications that reflect the typical impact of changes in economic variables on receipts and spending. These estimates are specific to our March 2017 forecast and we would expect them to become outdated over time, as the economy and public finances, and the policy setting, continue to evolve. They are subject to uncertainty because they are based on models that draw on historical relationships or simulations of policy settings. More information can be found in the ‘Tax and spending ready reckoners’ spreadsheet we published alongside our 2019 Fiscal risks report.

The table below shows that:

    • higher real GDP (which is used as a proxy for total demand for fuel) would increase fuel duty receipts due to increases in both business and household spending;
    • higher RPI inflation would increase fuel duty receipts (in line with the uprating assumptions set out by the Government, our default assumption is that duty rates are indexed in line with RPI);
    • higher oil prices would reduce the demand for fuel by raising its price. That would therefore reduce fuel duty receipts, which is charged on the number of litres consumed.

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