With petrol now at 143.73p per litre and diesel at 164.82p, drivers are paying more at the pumps than at any point in the past 20 months. But where does that money actually go?
Understanding what makes up the price of fuel can help you see why prices spike during global crises – and why they don’t always fall as quickly as you’d expect.
The Fuel Price Breakdown
At least 50% of what you pay per litre goes straight to the government in tax. The rest covers the actual cost of fuel, delivery, and retailer margins.
Here’s how it breaks down:
Petrol (at 140.28p per litre)
- Wholesale fuel cost: 63.95p (46%)
- Fuel duty: 52.95p (38%)
- VAT at 20%: 23.38p (17%)
Diesel (at 158.78p per litre)
- Wholesale fuel cost: 79.37p (50%)
- Fuel duty: 52.95p (33%)
- VAT at 20%: 26.46p (17%)
The wholesale cost also includes retailer margins, delivery and distribution costs, and bio-content – the cost of making fuel more environmentally friendly.
Fuel Duty: The Fixed Tax
Fuel duty is a flat tax of 52.95p on every litre of petrol and diesel sold in the UK. It doesn’t change based on the price of oil – whether crude is at $50 or $100 a barrel, fuel duty remains the same.
This includes a temporary 5p cut introduced in March 2022 when Russia invaded Ukraine, which has been extended several times since.
At the current rate, fuel duty generates around £24 billion per year for the government – equivalent to approximately £835 per household.
The 5p Cut Is Being Reversed
The temporary 5p fuel duty cut is being phased out over the next year:
- August 2026: Duty rises 1p to 53.95p per litre
- December 2026: Duty rises another 2p to 55.95p per litre
- March 2027: Final 2p increase to 57.95p per litre
By March 2027, fuel duty will be back to its pre-2022 level of 57.95p per litre. Combined with current wholesale prices, this could push petrol towards 150p and diesel past 170p – before any further oil price increases.
Motoring groups have urged the Chancellor to delay these increases given the current crisis. AA president Edmund King said: “We strongly encourage the chancellor to delay the staggered reintroduction of the 5p fuel duty discount in order to offer some breathing space for hard-pressed households.”
VAT: The Tax on Top of Tax
VAT is charged at 20% on the total price – including the fuel duty. This means you’re effectively paying tax on tax.
At current prices:
- Petrol VAT: 23.38p per litre
- Diesel VAT: 26.46p per litre
When fuel prices rise, the government takes more in VAT. A 10p increase in the base price adds 2p in VAT on top.
Wholesale Costs: Where the Volatility Comes From
The wholesale cost of fuel – the price before tax – is where all the volatility sits. This is driven by:
Global oil prices – Brent crude, the international benchmark, has surged above $100 a barrel due to the Middle East conflict. When oil prices spike, wholesale fuel costs follow.
Refining costs – Crude oil must be refined into petrol and diesel. Refinery capacity, maintenance schedules, and regional demand all affect this cost.
Exchange rates – Oil is priced in US dollars. When the pound weakens against the dollar, fuel becomes more expensive for UK buyers.
Supply disruptions – The closure of the Strait of Hormuz, through which 20% of the world’s oil flows, has severely impacted supply chains and pushed wholesale costs sharply higher.
Why Diesel Costs More Than Petrol
Diesel is currently 18.5p per litre more expensive than petrol. This gap has nearly doubled in the past month.
The reasons:
Higher wholesale costs – Diesel’s pre-tax cost is 79.37p compared to petrol’s 63.95p. Diesel requires more intensive refining and is in higher demand globally for freight and shipping.
Supply chain exposure – Europe imports a significant portion of its diesel. Disruptions to Middle Eastern supply hit diesel harder than petrol.
Heating demand – Diesel and heating oil are similar products. Winter demand for heating can push diesel prices higher.
Retailer Margins: The Controversial Slice
The amount retailers make on each litre sold has come under scrutiny. The Competition and Markets Authority has warned that fuel margins remain “persistently high” compared to historic levels – and that this cannot be explained by retailers’ operating costs.
Chancellor Rachel Reeves accused some retailers of “price gouging” after prices at some forecourts hit nearly 180p per litre while others charged less than 130p.
This 50p variation shows why shopping around matters. Use CheckFuelPrices to compare prices at stations near you and avoid paying more than necessary.
How Much Goes to the Government?
In total, government taxes account for over half of what you pay at the pump:
- Petrol: 76.33p per litre (54%) goes to the government
- Diesel: 79.41p per litre (50%) goes to the government
On a 50-litre tank:
- Petrol: £38.17 in tax
- Diesel: £39.71 in tax
Fuel duty alone brings in around £24 billion per year, rising to a projected £26.2 billion by 2027/28 as the 5p cut is reversed.
Why Prices Rise Faster Than They Fall
Drivers often notice that pump prices shoot up when oil prices rise, but seem to fall more slowly when oil prices drop. This phenomenon is known as “rocket and feather” pricing.
The CMA is investigating whether fuel retailers are engaging in this practice – raising prices quickly in response to cost increases but reducing them slowly to boost profits.
This is another reason why checking prices matters. During volatile periods, some retailers raise prices faster than others. Finding the stations that haven’t yet increased can save you significant money.
What Can Drivers Do?
You can’t control oil prices, fuel duty, or VAT. But you can control where you fill up and how you drive.
Shop around – Price differences of 20-50p per litre mean potential savings of £10-25 per tank. Check CheckFuelPrices before every fill-up.
Drive efficiently – Smooth acceleration, proper tyre pressures, and steady speeds can cut consumption by up to 30%.
Cut non-essential trips – With prices this high, every unnecessary journey costs money.
Use supermarkets – Asda, Tesco, Sainsbury’s and Morrisons typically offer the cheapest fuel. Compare prices by brand to find the best value near you.
The Bottom Line
More than half of what you pay at the pump goes to the government in tax. The rest covers wholesale fuel costs, delivery, and retailer margins.
When oil prices spike – as they have during the current Middle East conflict – wholesale costs surge, VAT increases proportionally, and prices at the pump follow. With fuel duty increases also scheduled for later this year, drivers face a challenging few months ahead.
The one thing within your control is where you buy. Check prices, shop around, and don’t pay more than you have to.