Analysis

Petrol prices: How much a 5p cut in fuel duty saves on filling your tank and what makes up the cost of petrol

With petrol prices reaching an all-time high, Chancellor Rishi Sunak has announced a cut to fuel duty. But how much will that help?

Petrol prices
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The Chancellor has cut fuel duty by 5p a litre to help drivers and businesses cope with rising prices and the cost of living.

The reduction, which he called "the biggest cut to all fuel duty rates ever", will start at 6pm on Wednesday and last until next March.

Mr Sunak is urging businesses to implement the change quickly, but how much difference will it make?

The average price of petrol has shot up to an all-time high of 165.37p a litre, an increase of more than 55% in the last two years. Diesel has also risen by a similar proportion to 177.47p per litre, according to figures compiled by the government.

As a result, the average tank of fuel now costs almost £90, up by about £33 compared to May 2020.

Fuel prices

Then, just under two years ago, petrol prices reached a four-year low as the coronavirus pandemic pushed the price of wholesale oil down.

But more recently, wholesale costs have been rising sharply, partly made more extreme by Russia's war in Ukraine.

How much tax do we pay on vehicle fuel?

A significant proportion of the cost of petrol and diesel goes on tax. Fuel duty is included in the price we pay. It has been frozen at 57.95 pence per litre since 2011.

On top of this, 20% VAT is added to the overall fuel bill.

Fuel prices

Will a 5p fuel duty cut make a significant difference?

Clearly, a reduction in duty will help drivers with the rising cost of fuel - but the question is how much? The table below shows the potential saving if 5p was cut from the fuel duty.

It currently costs £91.87 to fill a 55-litre tank. A 5p cut in the fuel duty is likely to lead to a 6p saving per litre (remember, VAT is paid on fuel duty too) and £3.30 saving per tank.

Fuel prices

As the overall price of fuel has gone up, there has also been a proportional rise in VAT.

The government currently earns about 10p more per litre of petrol through VAT than it did in May 2020 - equivalent to about £5.42 extra on the cost of a whole tank.

This means that even after reducing fuel duty by 5p per litre, the government would be taking a little under 4p more from drivers than it was a couple of years ago - £2.12 per tank.

Revealed: The areas worst hit by fuel poverty in the UK

RAC, the car breakdown and insurance firm, welcomed the 5p cut in fuel duty, but added the measure is "a drop in the ocean" and "may not be deep enough to make a real difference".

RAC fuel spokesman Simon Williams said: "Ensuring all drivers fairly and fully benefit from the fuel duty cut depends entirely on retailers reducing their prices and not using it as an opportunity to take a greater profit on every litre they sell."

Will there be a wider benefit?

While not everyone owns a car, cutting fuel duty could also mitigate the rising price of food and other goods as it will help businesses manage the cost of transporting their products.

But, again whether consumers benefit depends on whether those businesses pass on the saving.

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