Ask any driver, and they will tell you that petrol does not come cheap. In fact, the average UK driver spends over £1,000 per year fueling their car.

Petroleum is made from crude oil, which in itself is very expensive. However, there are also additional fuel duties that are paid in tax on top of the initial cost, as well as VAT that is paid on both the pre-tax and post-tax price of petrol.

So how much does petrol cost overall? What factors influence its price? And what taxes are levied on fuel consumption?

We are going to explore all this and more as we jump into: do you pay VAT on petrol?

In the UK, VAT is added to fuel prices. VAT is paid at every stage of production and distribution, which means that it is paid on both the sale of the pre-tax price of the fuel and the additional fuel duty that is levied on fuel consumption.

VAT is a tax on consumption, and the standard rate in the UK is currently 20%. Fuel duties are also levied on petrol, though the exact amount is determined by the type of fuel used.

So let's now find out how and why petrol has become so important in the modern world.

Petrol and petroleum products are used to propel vehicles, heat buildings, and even produce electricity. Petroleum is made from crude oil and hydrocarbons. Crude oil is the single biggest energy source in the world, and the world in its current form could not survive without it.

Edwin L. Drake was the first American to successfully drill for oil, and his exploits started the modern relationship with oil as the primary energy source. He did so in Titusville, Pennsylvania, on August 27th, 1858.

To this day, August 27th is celebrated as national petroleum day in the US. People working in the oil and gas industries mark the day by discussing the issues within the industry and the plans for the future.

Value Added Tax (VAT) is a tax on consumption. It is levied on the price of a product or service at every stage of production, distribution, or sale to the consumer.

Some goods and services pay a reduced VAT rate, and others are exempt from paying it altogether.

In the UK, the current standard rate of VAT is 20%. Most goods and services are marked up by 20% of the original pricing, and the tax is then paid directly to HMRC.

VAT is known as a regressive tax. A regressive tax is one that takes a higher portion of the income from low-income earners than from high-income earners. As VAT is charged at a flat rate for everyone, all consumers pay the same amount no matter how much they earn.

On average, VAT contributes over 20% to the UK's annual tax budget.

Fuel duty is a tax levied on the consumption of petrol, diesel, and other fuels such as bioethanol and kerosene.

Fuel duties amount to a significant source of revenue for the UK government. In the tax year 2022 to 2023, field duties are predicted to raise over £26 billion, which would represent nearly 3% of all tax receipts and works out at around £930 per household.

Depending on the type of fuel, fuel duty is paid per litre or kilogram of fuel consumed.

As of 23 March 2022, the current fuel duty rates are as follows:

  • unleaded petrol, diesel, biodiesel, and ethanol are charged at a rate of 52.95 pence per litre.
  • liquefied petroleum gas is charged 28.88 pence per kilogram.
  • natural gas used as fuel in a vehicle (e.g., biogas) is charged at a rate of 22.57 pence per kilogram.
  • fuel oil burned in a furnace or used for heating is charged at a rate of 9.78 pence per litre.

As we have seen, fuel duties are used to generate large amounts of revenue for the government. They are also a good way of deterring drivers from using their cars too much, and the money generated from the fuel tax can be used to offset some of the carbon emissions from the cars.

Do you pay VAT on fuel duty?

VAT is levied after fuel duty, which means that VAT is paid on both the pre-tax price of the fuel and the price of the additional fuel duty.

So the pump price for a litre of petrol is currently the pre-tax price of the fuel plus 20% added for VAT, then an additional 52.95 pence of fuel duty plus 20% of that (10.59 pence) for VAT.

If your vehicle is used solely for business purposes, you can claim back the VAT you spend on petrol. However, if you use your vehicle for any personal use, no matter how infrequently, you cannot claim back the VAT expenses.

You can reclaim VAT expenses for business purposes by opening up a VAT account with HMRC online.

Prior to 2019, Mexico was the only country in the world not to charge fuel duty. Since then, however, Mexico has introduced fuel duties, though they are still amongst the lowest in the world. So every country has fuel duty charged on car fuel.

However, not every country charges VAT. For example, there is no federal VAT in the USA, and only few states charge it as a state tax. Tax havens such as Bermuda, the British Virgin Islands, and the Cayman Isles also don't charge VAT, amongst a handful of others.

Petrol prices have been rising across the world since the Covid-19 pandemic.

The current pump prices (August 2022) in the UK are:

  • Unleaded: 170.97 pence per litre.
  • Super unleaded: 183.73 pence per litre.
  • Diesel: 182.59 pence per litre.
  • LPG: 82.82 pence per litre.

In March 2022, the UK government announced that it would cut the fuel duty on petrol and diesel by 5 pence per litre for next tax year.

While this initially had a significant impact, petrol was then 167 pence per litre and diesel was just under 180 pence per litre, so the average prices have since cancelled out the 5 pence price reduction.

Petrol prices reached record highs in the UK in July 2022, with an average price per litre of 191.53 pence for petrol and 199.07 pence for diesel. Although the prices have fallen slightly since then, petrol is increasingly unaffordable for many people in the UK, and the prices are significantly higher than at the start of the year.

So why is petrol currently so expensive?

The price of crude oil has risen sharply since the beginning of the Covid-19 pandemic. At the onset of the pandemic, many businesses closed either temporarily or for good, and the demand for crude oil collapsed.

However, as the world started to open up again, the demand for crude oil and energy increased, but the suppliers have struggled to keep up their end of the chain. This has led to a spike in prices as the supply is currently limited, and when demand exceeds supply, prices are driven up.

Moreover, the crude oil that is used to make petroleum is paid for in US dollars, and the pound is currently weak against the dollar, which makes the cost of fuel even higher.

And there is the added detail of the ongoing war in Ukraine. Russia is one of the largest oil exporters in the world but has faced sanctions from much of the West since the invasion in February.

The US has introduced a total ban on importing Russian oil, and the UK and the EU hope to have phased it out by the end of the year. This has led to increased demand from other producers, which has also contributed to driving the price of oil up.

For drivers with regular cars, petrol costs cannot be avoided. However, there are a number of things you can do to save money on filling up your tank.

So let's take a look at some of them.

  • Fill up at supermarkets. Supermarkets tend to be cheaper than oil-company petrol stations. Also, it is usually cheaper to fill up in towns and cities than it is in rural locations because the surrounding competition is greater in built-up areas.
  • Don't use premium unleaded. If your car uses unleaded petrol, there is no need to fill it up with premium unleaded unless you drive a performance car. Even if you drive a performance car, you shouldn't need premium unleaded unless you are racing it or using it for purposes that go beyond the capabilities of regular driving.
  • Drive smoothly. Maintaining a consistent speed and not changing gears too much is one of the best ways to preserve petrol.
  • Change gears early. If you are in low gear and driving fast, the engine has to rev a lot to keep up with the speed. Changing gears early means that the engine doesn't over-rev and will, therefore, preserve more petrol.
  • Keep to the speed limit. Driving fast uses more petrol, so keep to the speed limit wherever you drive.
  • Maintain healthy tyre pressure. If your tyres are low on pressure, the car has more work to pull itself forward and uses more petrol. Check your tyre pressure every month to make sure they are at healthy levels.
  • Drive light. The heavier the car, the more petrol it uses. So keep your boot as clear as possible and don't laden the vehicle with extras like bike racks if they are not being used.
  • Limit your use of heat controls. Air conditioning is one of the biggest drainers of petrol, so only use it when necessary. The same is true for demisters and heaters.
  • Choose a greener vehicle. Some vehicles use a lot less petrol than others. While these vehicles often cost more than their petrol-guzzling counterparts, they will likely pay off in the long run. Hybrid vehicles are increasingly popular, and, of course, there is always the option of an electric car.

VAT is added to the pump price of petrol. Drivers also pay fuel duties when they buy petrol and pay VAT on that as well as the initial cost. Petrol prices have rocketed since the easing of the Covid-19 restrictions and the onset of the Russian invasion of Ukraine. Although a 5 pence per litre price reduction was introduced in the UK, the inflated prices have already far exceeded the offset costs.

There are many things you can do to reduce your fuel consumption, even if you drive your car regularly. In these testing times, limiting your fuel consumption is important for both the health of the planet and your wallet.