UK to Delay Hike in Motor Fuel Tax to Show Action on Prices

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(Bloomberg) — The UK will delay a planned hike in motor fuel duty in a bid to ease the pressure on drivers since the war in Iran erupted.

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Prime Minister Keir Starmer said on Wednesday that the government will maintain the current duty rates until the end of the year after a surge in petrol and diesel prices triggered by the conflict. Bloomberg reported the plans shortly before the announcement.

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Fuel duty was due to increase by 1 pence per liter in September and rise a further 2 pence in December and 2 pence in March 2027. 

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The Treasury also announced a 12-month road tax holiday for hauliers, while the duty rate on red diesel will be cut by over a third until the end of the year to help farmers, rail freight and other users facing increased costs. 

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The total package of support is worth more than £400 million ($536 million), which will be partly funded by the already announced increase in the rate of the electricity generator levy from 45% to 55% from July. It is applied to non-gas energy generators like wind and solar that make excess profits when high gas prices push up electricity prices.

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It comes as Starmer tries to shore up his position as prime minister after heavy losses for the ruling Labour Party in local elections earlier this month. Downing Street is bracing for a challenge to his leadership after several members of his government resigned following the results, including Health Secretary Wes Streeting.

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Motor fuel has kept UK inflation well above the Bank of England’s 2% target in recent months, increasing pressure on Starmer’s embattled government to ease the cost of living for households. High fuel costs also feed through into the price of other goods such as food.

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The average price of a liter of petrol has jumped almost 26 pence to 157 pence since the war broke out in late February, a 20% surge, according to government data. Diesel costs have risen even further, a 32% increase to 187 pence per liter.

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A 5-pence reduction in fuel duty was announced by the previous Conservative government in the wake of Russia’s invasion of Ukraine. It was meant to last just a single year, at a cost of £2.4 billion in the 2022-23 fiscal year. The cut was subsequently maintained, however, meaning fuel duties were last raised in 2011.

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Chancellor of the Exchequer Rachel Reeves said in a statement that “strong growth at the beginning of the year” had allowed her to step in to “protect people at the pump.”

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“I’m keeping taxes down for drivers and businesses – putting money in the pockets of millions of workers and cutting costs for farmers and hauliers,” she said.

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The Institute for Fiscal Studies warned that the government is likely to come under pressure to extend the temporary measures.

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“The fuel duty cuts are targeted towards those households and firms most exposed to fuel price increases — though they will of course also weaken incentives to reduce fuel use,” said Isaac Delestre, senior research economist at the IFS.

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—With assistance from Andrew Atkinson and Philip Aldrick.

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(Adds detail on funding of measures and comment)

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