Fuel duty UK: RAC warns drivers of potential tax rise in upcoming Labour budget - what is pay per mile?

• Drivers may face a fuel duty increase in the upcoming Government Budget
• The RAC warns that Labour might raise fuel duty to address Treasury losses
• Some suggest a pay-per-mile system as a fair alternative to fuel duty, especially with the rise of electric vehicles
• Chancellor Rachel Reeves will present her first Budget on 30 October

Drivers are being warned to brace for a potential increase in fuel duty in the upcoming Government Budget.

The RAC issued the warning following Prime Minister Sir Keir Starmer’s announcement of a £22 billion “black hole” in the public finances.

In March 2022, the Conservative government implemented a 5p per litre reduction in fuel duty. Prior to that, the rate had been frozen at 57.95p since March 2011. VAT at a rate of 20% is added to the overall price.

RAC head of policy Simon Williams said Chancellor Rachel Reeves has “no option but to put fuel duty back up to 58p a litre in October’s Budget”.

He added: “She knows the 5p discount is losing the Treasury £2 billion a year. She also knows drivers were overcharged by a staggering £1.6 billion last year according to the Competition and Markets Authority’s recent report.

“We’d normally be against any increase in duty, but we’ve long been saying drivers haven’t been benefiting from the current discount due to much higher-than-average retailer margins.”

Will there be a fuel duty rise?

Reeves will deliver her first budget on 30 October - but will a rise in fuel duty actually be a part of it?

The Prime Minister has so far been unable to say a rise in fuel duty would not be part of the package when the Budget is announced.

Challenged on specific tax rises by reporters in Berlin on 28 August, the Prime Minister reiterated his manifesto commitment not to raise income tax, national insurance or VAT – which he has previously described as taxes on “working people”.

But he was unable to rule out the first rise in fuel duty since 2010, saying he would not “speculate” on the Budget.

In a speech in 10 Downing Street’s garden on 27 August, Sir Keir warned the next Budget would be “painful”, and the public needed to “accept short-term pain for long-term good”, taken by some as paving the way for tax rises.

Could there be a ‘pay-per-mile system’?

Duties levied on petrol, diesel and other fuels generate around £25 billion a year in revenue for the Treasury. This figure is expected to dwindle as more drivers transition from traditionally-fuelled cars to zero emission vehicles (ZEVs) such as electric cars.

That’s led some bodies - including the RAC - to urge Reeves to impose a pay-per-mile scheme on UK drivers, which could see drivers of ZEVs charged based on how far they travel.

Williams said: “As more and more electric vehicles come on to the roads, the Government will need to tax drivers differently.

“We think replacing fuel duty with a pay-per-mile system as soon as possible is the way forward as then the only tax levied on fuel would be VAT. This would give retailers nowhere to hide.”

Public transport charity Campaign for Better Transport (CBT) has issued a similar plea, claiming it would have public support.

CBT director of policy and campaigns Silviya Barrett said: “The new Chancellor faces a looming black hole. She can avoid it, in a way which is fair and which garners broad public support.

“It should be cheaper to drive a zero-emission vehicle than a more polluting vehicle, but it’s only fair that these drivers should pay a share, and a pay-as-you-drive model can achieve this.”

Under the plan, drivers with a ZEV before the implementation date would be exempt, incentivising the switch to electric motoring. But successive governments have found the prospect of introducing per-mile charges to be too politically toxic.

What do you think about the potential rise in fuel duty and the possibility of a pay-per-mile system? How would these changes affect you personally? Share your thoughts and experiences in the comments section.