The government and HM Revenue & Customs (HMRC) have been issued a stark warning over the future of fuel duty, as a growing exodus of drivers from petrol and diesel cars threatens to blow a multi-billion pound hole in the public finances.
A Short-Term Fix for a Long-Term Problem
The Association of Taxation Technicians (ATT) has cautioned that the current approach to taxing motorists is merely a short-term fix to a long-term problem. This warning follows official figures revealing a drop in tax receipts, as confirmed in last month's Budget by the Labour Chancellor.
The Chancellor announced that the temporary 5p per litre cut in fuel duty, first introduced in 2022, will be gradually reversed starting from September 2025. However, until September 2026, the duty will stay frozen at 52.95p per litre for both petrol and diesel. This marks an unprecedented 16 consecutive years without an increase.
The £25 Billion Revenue Decline
Emma Rawson, ATT Director of Public Policy, highlighted the scale of the fiscal challenge. "Fuel duty used to raise close to £25 billion a year, but repeated freezes mean it has failed to keep pace with inflation," she stated.
Rawson further explained that the freeze has also suppressed VAT income, as VAT is calculated on the total price of fuel, which includes the duty. "HMRC’s monthly receipts show that the decline in fuel duty is already well under way," she added.
While the gradual unfreezing of the duty from next year may provide a temporary boost, the ATT warns this is not a sustainable solution. The dual trends of increasing electric vehicle adoption and improved fuel efficiency in conventional cars mean any revenue gains will be short-lived. Notably, electric vehicles currently pay no fuel duty at all.
The Call for a Coherent Road Pricing Solution
The ATT argues that the government's current measures are insufficient. "The government is right to start thinking about how fuel duty is replaced in a post petrol- and diesel world, but the measures announced so far amount to little more than tarmac over the hole," said Rawson.
She warned that a piecemeal approach risks discouraging the vital shift to electric vehicles while failing to establish a stable, long-term revenue stream for the Treasury.
The tax body suggests that ministers must consider more radical, fairer systems if they are serious about both fiscal sustainability and environmental goals. "More coherent, technology-neutral solutions – such as universal road pricing applied fairly to all vehicles – may need to be considered," Rawson concluded.
