How much is fuel duty and what will the cut on petrol save you?

By Michael Race
Business reporter, BBC News

Image source, Getty Images

The government is cutting fuel duty on petrol and diesel by 5p per litre. It says the reduction, which will last for a year, will help drivers cope with rising fuel costs.

Chancellor Rishi Sunak announced the measure in his Spring Statement.

What is fuel duty?

Fuel duty is a government tax which makes up part of the price when you buy petrol, diesel or other fuel for vehicles or heating.

For petrol and diesel it has been 58p per litre for the past 11 years. Another tax, VAT at 20% is applied on top of this.

Fuel duty accounts for over a third of the price of a litre of petrol.

It earns a lot of money for the government - £28bn in 2019-20, or about £1,000 per household.

What difference will the cut make?

According to the RAC, a 5p reduction in fuel duty makes it £3.30 cheaper to fill up a typical family car with a 55-litre tank.

Filling that car up with petrol on 21 March, for example, would have cost more than £90.

Pressure to take action has grown because prices at the pump have risen to a record high. Petrol reached £1.67 per litre on Sunday 20 March and diesel £1.79.

The price rises - up more than 40p per litre since last year's Spring Statement - mean the government is now getting an extra 7p per litre in VAT from fuel.

So the chancellor can afford to cut fuel duty by 5p and still be making more per litre in tax than he did a year ago.

Why are pump prices so high?

The price of fuel has increased because the price for crude oil, which is used to make petrol and diesel, has risen.

At the start of the Covid pandemic demand for energy collapsed - pushing down prices.

As life has returned to normal - and demand for energy has grown - suppliers have sometimes struggled to meet this demand and prices have risen.

What impact has the war in Ukraine had?

Prices were rising before the war in Ukraine - and the fallout from Russia's invasion has made things worse.

The US has announced a complete ban on Russian oil imports. The UK is to phase out Russian oil by the end of the year.

Russia is the European Union's biggest oil trading partner and is one of the world's largest oil exporters.

It means demand for oil from other producers has increased, leading to higher prices.

And although the UK imports just 6% of its crude oil from Russia, it is still affected when global prices rise.

When oil prices move do petrol prices also change?

When wholesale energy prices move, petrol and diesel prices usually do too.

But petrol retailers don't always pass on all of the changes to their customers immediately, or in full.

In January, the RAC accused petrol retailers of keeping prices unnecessarily high and taking extra profits even after wholesale prices dipped.

But the Petrol Retailers Association said customers bought 15% less fuel last year and retailers had to make higher profits on each litre sold to cover their overheads.