UK drivers face new motoring taxes as Fuel Duty collapses
Key Points
- Fuel Duty raised £24 billion in 2025-26 but the switch to electric vehicles is hollowing it out
- The Resolution Foundation says reforms announced in last year's Budget must go further to replace lost receipts
- The warning forms part of research showing weak growth, ageing and ill health cost Britain £330 billion a year
- The incoming Chancellor's fiscal headroom has likely fallen from £23.6 billion to £10 billion
British motorists face further motoring tax reform as the switch to electric vehicles hollows out the £24 billion that Fuel Duty raised last year, new research from the Resolution Foundation shows.
The think tank’s report, The Great Escape, urges the incoming Prime Minister and Chancellor to “beef up” reform of motoring taxes as one of several measures needed to repair the public finances.
It warns that the reforms announced in last year’s Budget will need building on to replace receipts lost as drivers abandon petrol and diesel.
The warning lands as EV adoption accelerates across the UK. Every driver who switches from a combustion engine to an electric car stops paying Fuel Duty entirely, shrinking a revenue stream the Treasury has relied on for decades. Without replacement taxes, the burden shifts onto other taxpayers or adds to borrowing.
Part of a £330 billion problem
The motoring tax warning forms part of a wider analysis of Britain’s fiscal position. The Foundation finds that weak growth, an ageing population and rising ill health since 2007 cost the country around £330 billion a year, paid for through record taxes, cuts to public services and extra borrowing.
Weak growth alone accounts for roughly £240 billion of the annual hit after accounting for offsetting squeezes on public sector pay and welfare. Ageing and ill health add around £90 billion more. Day-to-day public services spending sits nearly £140 billion below its pre-financial-crisis path, while the tax-to-GDP ratio reached a 75 year high in 2025-26.
Simon Pittaway, Senior Economist at the Resolution Foundation, said Britain must “break out of its fiscal funk and get the public finances back on a sustainable path”.
He warned that otherwise “the choices over which taxes to raise, which public services to ration and how much more we spend on servicing our debt will get even more painful”.
No runway left
Drivers hoping for relief should not expect generosity from the next Budget.
The Foundation estimates that war in the Middle East has cut the incoming Chancellor’s headroom against the fiscal rules from £23.6 billion at the Spring Forecast to just £10 billion today.
That leaves any new spending commitments needing full funding, and strengthens the case for replacing Fuel Duty receipts rather than letting them erode.
The report also recommends replacing the pensions Triple Lock, which costs £12.6 billion more in 2026-27 than an earnings link, with a smoothed earnings link.
Pittaway said an incoming PM and Chancellor “offer the perfect opportunity to start afresh”, but added that sounder public finances require honesty “that everyone needs to pay their part through a more efficient, broad-based tax system”.
