Every time a UK motorist fills up, HM Treasury takes a cut twice over: once through fuel duty, a fixed charge per litre, and again through VAT, which is calculated on the duty-inclusive price. The result is that VAT and duty together can account for roughly half of what you pay at the pump, even though VAT itself is officially a 20% tax. Understanding where that 20% actually lands — and why it is levied on top of another tax — explains a lot about why pump prices barely move even when wholesale oil prices fall.
Breaking down a 145p litre of petrol
Using a representative UK average petrol price of around 145p a litre, based on the pattern of prices tracked weekly by the Department for Energy Security and Net Zero (DESNZ) and reported by the AA and RAC, it is possible to split the pump price into its component parts. Fuel duty is currently 52.95p a litre, a rate that has been frozen since 2022 and includes the temporary 5p cut that has been repeatedly extended at successive Budgets.
VAT is then charged at the standard rate of 20%, but crucially it is applied to the whole retail price, duty included. On a 145p litre, that works out at roughly 24p in VAT. Subtract both taxes from the pump price and what is left — around 68p — covers the wholesale cost of the refined product, distribution, retailer overheads and forecourt margin.
That means duty and VAT combined take up close to 53% of the price on the forecourt sign, even though only one of those two charges is technically described as a tax on the transaction.
The duty-on-duty effect
The reason VAT looks larger in cash terms than its 20% label suggests is that it is not calculated on the cost of the fuel alone. It is calculated on the final retail price, which already has duty baked into it. In effect, motorists pay VAT on the duty itself, a mechanic sometimes called 'tax on tax'.
This is standard practice across excise duties in the UK, applied in the same way to alcohol and tobacco, and it is not unique to fuel. But because fuel duty is a large flat charge per litre rather than a percentage, the duty-on-duty effect adds a noticeably fixed amount to every fill-up regardless of how cheap or expensive the underlying oil price is.
It also explains why cuts to wholesale fuel prices do not always feel proportionate at the pump. When crude oil falls, the pre-tax cost of fuel falls with it, but duty stays fixed in pence and VAT recalculates on a smaller base — so retail prices move by less than the wholesale change would suggest.
How this compares with charging an EV
Electric vehicles are not subject to fuel duty at all, which is one reason running costs have looked favourable despite rising electricity prices. However, VAT treatment differs depending on where you charge. Electricity supplied to a home is taxed at the reduced 5% VAT rate, while electricity bought at public charge points is taxed at the full 20% rate — the same rate that applies to petrol and diesel.
This distinction has become a live policy question as more drivers without off-street parking rely on public chargers, and the RAC and other motoring groups have argued the gap creates an unfair penalty for drivers who cannot charge at home.
The OBR's fiscal forecasts already flag that fuel duty receipts will decline over the next decade as EV adoption grows, and successive Budgets have floated (without yet implementing) some form of road pricing or per-mile charge to replace the revenue duty currently provides.
Why the freeze does not mean cheaper fuel
Because fuel duty has been frozen in cash terms since 2011, aside from the 2022 cut, its real value has fallen with inflation, according to ONS figures on the retail price index. That erosion has offset some of the effect of VAT rising on higher pump prices over the same period.
In practice this means the tax share of the pump price shifts slightly whenever wholesale costs change, since VAT scales with price but duty does not. When oil prices spike, VAT's share in pence rises even though the rate stays at 20%, while duty's share shrinks proportionally.
For drivers, the practical takeaway is that neither duty freezes nor VAT rate changes are likely to produce dramatic swings in pump prices on their own — the bigger driver, as ever, remains the wholesale cost of crude oil and refined product.
The takeaway
VAT is officially a 20% tax, but because it is charged on top of fuel duty rather than on the fuel's underlying cost, it adds around 24p to a typical 145p litre of petrol — and duty and VAT combined account for roughly half the pump price. The duty freeze has softened some of the tax burden in real terms since 2011, but the VAT-on-duty mechanic means the tax share of any pump price rise is always slightly larger than the headline rate implies.
