This article examines the effect of duties on petrol and diesel on higher and lower income households.
The Exchequer received approximately 80 pence for each £1 spent on petrol and diesel in the period 2001/02 to 2003/04, although this reduced until 2008/09 when 62 pence in the pound was paid in tax. In 2009/10 66 pence in each pound spent on petrol and diesel was received by the Exchequer. The rise in 2009/10 can in part be attributed to changes to the rates of duties on fuel, and in part to changes in oil prices.
In this analysis duties on fuel include both fuel duty and Value Added Tax (VAT) on petrol and diesel. Fuel duty is levied at a fixed rate per litre, while VAT is levied as a percentage of the price of petrol and diesel. For example, in March 2010 the average price of petrol per litre was 115 pence, 73 pence was paid in duties on fuel, and of this, 17 pence (17.5 per cent of the fuel price) was paid in VAT and 56 pence (the per litre rate on unleaded petrol) was paid in fuel duty. For more information on the effect of VAT on household disposable income see: Poorest households spending more on VATable items than in 1986
Looking at average monthly petrol prices and duties on fuel, we can consider what drove the fall in tax revenue as a proportion of petrol spending. The chart shows that over the period the increase in petrol prices outstripped the increases in duties on petrol. From April 2001 to March 2010 average petrol prices increased by 52 per cent while duties on petrol increased by only 26 per cent. Therefore, the fall in the proportion of petrol spending received by the Exchequer was driven by petrol prices increasing at a faster rate than fuel duties.
Poorer households tend to spend more of their disposable income on duties on petrol and diesel than richer households. On average the poorest fifth of households (as measured by equivalised household disposable income) paid 3.4 per cent of their disposable income on duties on petrol and diesel over the period 2001/02 to 2009/10; this is compared to an average of 1.9 per cent for the richest fifth of households. Households in the 2nd, 3rd, and 4th quintile groups paid a similar proportion of their income on duties on petrol and diesel over the period, spending on average 2.8, 2.9 and 2.8 per cent respectively.
Although the poorest fifth of households paid more on duties on petrol and diesel as a proportion of their income, they actually paid on average the least in cash terms. In 2009/10 the average household in the poorest fifth group paid £365 in duties on petrol and diesel, this has been broadly constant over the period. Meanwhile, the richest fifth of households paid £1,062 in duties on fuel in 2009/10; this simply reflects higher spending on petrol and diesel. It is shown that although the 2nd, 3rd and 4th groups paid a similar amount as a proportion of their disposable income, in cash terms there was a noticeable difference between these groups. This shows that in these middle income groups, spending on petrol and diesel increases in a similar proportion to increases in their incomes.
We can see that those in the top two income groups were most likely to report spending on petrol and diesel; this was quite stable over the period and averaged 78 per cent of these households. The poorest two-fifths of households were least likely to report spending on petrol and diesel. There was a jump in those households recording purchase of petrol and diesel in the poorest two groups of households in the most recent period. For the poorest fifth of households, those reporting petrol and diesel spending increased from 40 to 47 per cent between 2008/09 and 2009/10. Over the same period, a 4 percentage point increase was seen in the 2nd income group.
This was mainly driven by an increase in retired households in the bottom quintile groups between 2008/09 and 2009/10. This was due to a change of the relative position of this group in the income distribution. Furthermore, the Living Costs and Food survey collects fuel spending data via a two week expenditure diary. Households who usually purchase petrol and diesel but who do not do so during the two week diary period will not have fuel reported.
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Household disposable income is that which is available to households for consumption, and is equal to earnings and investment income plus cash benefits (provided by the state) less direct taxes. Further details of the calculation of household disposable income can be found in The effects of taxes and benefits on household income.
Income quintile groups
Income quintile groups are based on a ranking of households by equivalised disposable income. Equivalised incomes are standardised to account for the fact that households of differing size or composition will require different income to achieve the same standard of living. In this analysis the modified-OECD equivalisation scale is used. Households referred to as the ‘poorest households’ are those in the bottom quintile group and the ‘richest households’ are those in the top quintile group.
1) These estimates are not consistent with estimates of duty on hydrocarbon oil in The effects of taxes and benefits on household income. The differences arise because the estimates in this analysis are calculated using an improved methodology and because these estimates include Value Added Tax (VAT) as well as fuel duty. The effects of taxes and benefits on household income calculates duty on hydrocarbon oils, based on fuels other than petrol and diesel. The improved methodology will be used in future publications of The effects of taxes and benefits on household income.
2) Previous analysis has shown how UK household indirect taxes can be both regressive and progressive depending on whether the distribution of households were ranked according to their disposable income, or their expenditure see: How indirect taxes can be regressive and progressive. (87.5 Kb Pdf) For example households may be income poor but able to draw on savings to fund expenditure. Furthermore, no allowance has been made for differences in the assets held by households even though some households may have little income but significant assets to draw on.
3) Spending on petrol and diesel is collected in the Living Costs and Food survey. The quantity of petrol and diesel purchased is calculated by dividing the spend reported by the average petrol and diesel price at that time. This allows the VAT and fuel duty components of petrol and diesel spending to be calculated.
4) Average petrol prices are taken from data from the Department of Energy and Climate Change. No differentiation is made for the price of different types of petrol and diesel. The methodology used in this article differs from that used by the Department of Energy and Climate Change as this article uses HMRC diesel and unleaded petrol duty rates throughout, while the Department of Energy and Climate Change use ultra low sulphur rates at some points in their time series.