Budget 2011: Fuel duty cut by 1p
In response to soaring global oil prices and higher costs at the pump, fuel duty will be frozen from further hikes and cut by 1p per litre from 6pm today.
The fuel duty escalator, bought in by the previous government to push costs higher in future years, will be scrapped and replaced with a fair fuel stabiliser.
Oil companies will also have to pay more tax in a response to rising global prices. The supplementary charge on oil and gas production will increase to 32% from 20% from midnight tonight raising an extra £2 billion. This money will pay for the 1p per litre cut on fuel.
Going forward, if the price of oil falls below $70 on a sustained basis, the government will reduce this extra tax back to 20%.
Fuel duty was planned to rise every year by at least the rate of inflation, and there was a 5p increase planned to come into place next week.
However, following the revelations in the Budget fuel duty will now increase by inflation only.
To help motorists, the 2011-12 inflation-only increase in fuel duty will be deferred to 1 January 2012 and the 2012-13 increase will be implemented on 1 August 2012.
Edmund King, the AA's president, says this action has probably stopped a "summer of discontent" and is a common sense move.
But he warns: "With jittery stockmarkets and tensions in North Africa pushing the oil price back into the $115-$120-a-barrel price range, pressure on pump prices and inflation could grow again. After all, petrol prices were 5p a litre cheaper only as far back as the end of January.
"The early January increase in VAT and duty is already bringing in an extra 5p litre for The Treasury."
King urges the government to do more to help vulnerable people, like volunteer drivers and those on poorer incomes, and also says currently more than 80p in the price of every litre of fuel goes directly to the Treasury so the government is taking more than its fair share from drivers.
George Osborne said the price of petrol has become a huge burden on families and in the last six months, the cost of filling up a family car such as a Ford Focus has increased by £10.
He admits that these changes alone will not end the pressure on family budgets but said: "We've done what we can to help".
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).