Fuel duty frozen but vehicle excise duty surges

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Rachel Reeves has reversed plans to raise fuel duty on British motorists, instead seeking increases in taxes on new petrol vehicles and fares of many public transport journeys.

The chancellor said on Wednesday that a rise in fuel tax would be “the wrong choice for working people”, citing concerns over the cost of living and the global uncertainty caused by the war in Ukraine. 

“There will be no higher taxes at the petrol pumps next year,” Reeves told MPs.

The chancellor had been expected to end the “temporary” 5p cut in fuel duty, but keeping the measure will cost £3bn next year and £890mn by 2029-30. The measure was introduced in 2022 after energy prices rose following Russia’s full-scale invasion of Ukraine, and has been continued by every chancellor since.

Edmund King, president of the AA, said the reversal in the chancellor’s plans was “a big relief”, with drivers facing “perma-high pump prices . . . well above anything motorists had endured before”.

But the Office for Budget Responsibility warned that the cumulative cost of freezing the tax from 2010-11 to 2025-26 has risen to about £100bn.

Carmaking executives were privately relieved, though one said it was a “missed opportunity” to end the freeze and help shift consumers towards electric vehicles at a time when sales are disappointing.

John Smith, chief executive of rail logistics company GB Railfreight, said the fuel duty freeze would have the “unintended consequence” of pushing more freight on to lorries. 

Meanwhile, steep increases in vehicle excise duty for petrol and hybrid cars will add £11.2bn to Treasury receipts by 2029-30. But the chancellor stopped short of introducing new incentives to boost consumer demand for electric cars.

Despite her intentions, industry officials said the increase in VED could actually disincentivise people from buying new cars, which would hurt overall demand for vehicles at a time when carmakers are squeezed by the higher costs of developing electric vehicles. 

The Society of Motor Manufacturers and Traders, which represents carmakers, said the extension of existing support measures such as tax incentives for corporate drivers were not enough in light of the recent slowdown in growth of electric cars sales. 

“The lack of substantive measures to support the new car market — in particular for electrified vehicles — is hugely disappointing,” SMMT’s chief executive Mike Hawes said. 

The government also faced criticism for protecting motorists while raising the price of many public transport journeys.

On the railways, annual price rises for regulated fares, which include season tickets, will increase by 4.6 per cent, 1 percentage point above retail price inflation. The cost of most railcards will also rise by £5.

The rise in fares is the lowest in absolute terms in three years, following a period of high inflation. 

Paul Morozzo, Greenpeace UK’s senior transport campaigner, said: “A sensible government approach would be to combine an increase in fuel duty with major investment to improve, expand and reduce the cost of public transport. Unfortunately the chancellor has used this Budget to maintain the freeze and put up rail and bus fares.”

The government said the revenue would help fund its reform of the rail industry, which had been heavily reliant on emergency support since the pandemic.

Reeves also confirmed a cap on bus fares in most of England will rise from £2 to £3 at the end of this year. The cap, introduced to help passengers during the cost of living crisis, had been due to run out at the end of the year.

Separately, environmental groups welcomed a decision to increase taxes on air travel. The measure will raise £720mn by 2029-30.

Air passenger duty is charged on each ticket sold for a domestic or international flight departing the UK and is typically passed straight on to customers through ticket prices. 

The rates for a non-economy seat currently range from £13 for a short-haul economy flight to £202 for journeys over 5,500 miles in premium classes. 

From the 2025-26 financial year, the levy will rise by 13 per cent compared with the previous year, equivalent to £2 for passengers flying on an economy short-haul flight, and £12 for long-haul.

Passengers in business and first class will pay “relatively more”, the Budget said, without disclosing details. 

Private jet users face a steeper increase, with a 50 per cent rise from 2026-27.

Reeves said this will be “equivalent to £450 per passenger for a private jet to, say, California”, she said, in a jibe at former prime minister Rishi Sunak.