After hinting at the move over the weekend, Mr Sunak announced that he would temporarily reduce the levy on wholesale prices by 5p per litre.
That brings fuel duty from 57.95p per litre to 52.95p per litre. Mr Sunak said the reduction would last until March 2023.
Announcing the move he said: “For only the second time in 20 years fuel duty will be cut. Not by 1p or 2p but by 5p per litre - the biggest cut to all fuel duty rates – ever.
“This is a tax cut for hard working families and businesses worth over £5bn a year.”
That figure is based on the combination of the cut and the impact of the previous fuel duty freeze announced in last autumn’s full Budget. In isolation the fuel duty cut should save drivers a collective £2.4bn in the next 12 months.
What does a fuel duty cut mean for drivers?
Fuel duty is a levy charged on every litre of fuel sold and is applied to the wholesale price of petrol and diesel before retailers set their forecourt prices.
A 5p per litre reduction should, in theory, mean a 5p per litre reduction in what retailers charge. In addition, it will reduce the cost of VAT which is charged after fuel duty, equating to a total saving of around 6p per litre for drivers.
At today’s prices, that would bring petrol down to an average of 161.3p per litre and diesel down to 173.72p.
Such a reduction would cut the cost of filling the average 55-litre tank of a family car by just over £3, bring a petrol fill-up down to £88.71 and diesel to £95.54.
However, the RAC’s head of policy Nicholas Lyes said the impact of the cut was a “drop in the ocean” compared with recent price rises and warned that retailers might not pass on the saving at a wholesale level to customers at the pumps.
He said: “In reality, reducing it by 5p will only take prices back to where they were just over a week ago. With the cut taking effect at 6pm tonight drivers will only notice the difference at the pumps once retailers have bought new fuel in at the lower rate. There’s also a very real risk retailers could just absorb some or all of the duty cut themselves by not lowering their prices. If this proves to be the case it will be dire for drivers.”
The RAC argues that a 5% reduction in VAT on fuel would be a fairer and “more powerful” tool in giving drivers some respite.
Mr Lyes added: “Temporarily reducing VAT would have been a more progressive way of helping drivers as the tax is applied at the point the fuel is sold, removing any possibility of retailers taking some of the tax cut themselves to increase their profits.”
Car tax rates 2022
Mr Sunak did not mention Vehicle Excise Duty - or car tax - in his statement. However, in the 2021 Autumn Budget he confirmed that VED would rise on 1 April in line with the retail price index measure of inflation.
That means the annual rate of tax will increase by £10 for most vehicles, rising from £155 per year to £165 for cars registered on or after 1 April 2017. The only exceptions are zero-emissions vehicles such as electric cars, which qualify for a £0 tax rate.
First-year tax rates, which are based on CO2 emissions, will also increase from the start of April for all but the least polluting cars. Vehicles emitting up to 75g/km of CO2 won’t see any change but those emitting 75-100g/km will see a £5 rise. For each band from 100g/km to 150g/km the cost will rise £10, with the increase getting larger for each band beyond that. Buyers of cars emitting more than 255g/km will pay £2,365, up from 2,245.
Owners of cars with a list price of more than £40,000 will pay the same £355 “luxury” tax in years two to six as before.
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