Tax by tax, spend by spend

Tobacco duties

This Forecast in-depth page has been updated with information available at the time of the March 2023 Economic and fiscal outlook. We are aware of a technical issue with our tableau charts across the site. Access the data from our March 2023 forecast and our November 2023 forecast supplementary tables directly.

Tobacco duties are levied on purchases of cigarettes, hand-rolled tobacco, cigars and other forms of tobacco. In 2023-24 we estimate that tobacco duties will raise to £10.4 billion. This represents 1.0 per cent of all receipts and is equivalent to 0.4 per cent of national income. Duty on cigarettes accounts for the majority of all tobacco duty receipts.

There are different rates for each type of product:

  • the rate on cigarettes is 16.5 per cent of the retail price plus £5.89 on a packet of 20;
  • the rate on cigars is £3.68 for a 10g cigar;
  • the rate on hand-rolling tobacco is £10.53 for a 30g packet; and
  • the rate on other smoking and chewing tobacco is £4.85 for a 30g packet.
  • the rate on tobacco for heating is £1.82 for a 6g pack.

VAT is applied after tobacco duty, so, for example, the price of a packet of 20 cigarettes currently reflects the pre-tax price plus 16.5 per cent ad valorem plus £5.89 of duty tax plus 20 per cent VAT on both the pre-tax price and the duty.

  Forecast methodology

Forecast process

The OBR commissions forecasts of tobacco duties from HM Revenue and Customs for each fiscal event. The forecasts start by generating an in-year estimate for receipts in the current year, then use 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 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

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

Our tobacco model is split into cigarette and non-cigarette clearances. For cigarettes, the model includes an underlying downward trend of 4 per cent a year, reflecting recent trends in consumption. The model includes a negative own-price elasticity for cigarettes, so above-inflation rises in the duty rate reduce the volume of clearances.

Non-cigarette clearances are also projected to fall over the forecast period, although at a slower rate than cigarettes.

The Government sets out policy assumptions for the uprating of tobacco duty each year. ‘Specific’ tobacco duty rates are set to rise in line with RPI inflation plus 2 per cent a year until the end of the Parliament.

Main forecast determinants

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

Main forecast judgements

The main forecast judgements in our tobacco duties forecasts include:

    • In-year estimate – our estimate for tobacco duty receipts in the current year is determined by year-to-date performance of receipts and indications from HMRC’s internal receipts monitoring. The in-year estimate determines the base year from which we use our model to forecast receipts growth.
    • The underlying trend in tobacco consumption – the downward trend in tobacco consumption has accelerated in recent years, partly reflecting changing attitudes and the increasing popularity of e-cigarettes. The slope of this downward trend over the forecast is uncertain. We use HMRC analysis to inform our judgement on the underlying consumption trend.
    • The effect of recent regulatory changes – these include the EU Tobacco Products Directive and standardised packaging regulations. The effect of these changes on tobacco consumption is highly uncertain and is difficult to isolate from the underlying trend.

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  Previous forecasts

Contrary to our earlier forecasts, tobacco duty receipts declined in cash terms after 2011-12, with differences between forecasts and outturn most pronounced from 2013-14 onwards. One reason for this has been lower-than-expected RPI inflation from 2014 to 2021, affecting the duty rates. Tobacco consumption was also weaker than we expected, which has led us to assume a steeper underlying downward trend in clearances (a 4 per cent a year underlying fall) since November 2016.

But in our March 2023 forecast receipts were revised down by an average of £0.8 billion a year. This downward revision reflects lower outturn receipts, lower inflation (affecting duty rates), and the ongoing shift towards new tobacco categories, such as heated tobacco, that are subject to a lower tax rate.

 

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  Policy measures

Since our first forecast in June 2010, governments have announced several policy measures affecting our forecast for tobacco duties. 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. These policy costings include:

    • Tobacco duty restructuring. At Budget 2011, the ad valorem rate was reduced from 24 per cent to 16.5 per cent, while the specific duty was increased by around 30 per cent to £154.96 per 1,000 cigarettes. This raised the duty on cheaper cigarettes by a larger amount.
    • Duty escalators have been applied to cigarette duty in every year since 2010. Since 2013-14, specific tobacco duties have risen by RPI plus 2 per cent. Autumn Budget 2017 announced that the RPI plus 2 per cent escalator would remain in place to the end of the Parliament, with a slightly higher in-year rise for duties on hand-rolling tobacco products.
    • At Spring Budget 2020 the Government reiterated the RPI plus 2 per cent escalator, which is again due to run until the end of the current Parliament.
    • At Autumn Budget 2021, the Government announced that in 2022-23 the hand-rolling tobacco duty will increase by an additional 4 percentage points, to RPI plus 6 per cent . The minimum excise duty will rise by an additional 1 percentage points, to RPI inflation plus 3 per cent.
    • At Spring Budget 2023, the Government announced that in 2023-24 the specific duty on hand-rolling tobacco will increase by 4 percentage points above the pre-announced duty rate increase (RPI plus 2 per cent). The Government also announced to increase the minimum excise tax by an additional 1 percentage point.[BB|(1]

The effects of regulatory changes (such as the EU Tobacco Products Directive and plain packaging rules) are factored into our forecast via our assumption on the overall trend in tobacco consumption. These are informed by evidence from HMRC.

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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 October 2021 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 on the data section of our website.

The table below shows that:

    • higher RPI inflation would increase tobacco duty receipts (applying the default indexation policy set out by the Government, we assume that duty rates are indexed in line with RPI plus 2 per cent until the end of the Parliament).
WordPress Data Table

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