Introduced to help tackle excessive sugar consumption and obesity in the UK, the sugar tax impacts businesses that manufacture, package, or import sugary drinks. This can have a significant knock-on effect for businesses relying on bottled or canned soft drinks and other ready-made beverages to create income. In this article we’ll look at how the sugar tax works, who is affected, and what this might mean for your business.
What is the sugar tax?
The sugar tax – or the Soft Drinks Industry Levy (SDIL) to use its proper name – is a tax on pre-packaged drinks that contain added sugar.
It aims to function as a kind of deterrent, encouraging drink manufacturers to reformulate high-sugar beverages in order to avoid paying the tax.
What does the sugar tax apply to?
There are also certain exemptions to be aware of though, so the sugar tax won’t apply to:
- Drinks with less than 5g of total sugar per 100ml
- Pure fruit and vegetable juices
- Alcohol-free beer and wine
- Powdered drinks
Pre-packaged milk-based drinks like bottled milkshakes and coffees are technically exempt for now, but this is also set to change from January 2028, including for plant-based alternatives (such as oat milk) with added sugar.
What this doesn’t include, however, are “open cup” milkshakes and coffees prepared in places like cafés, bars or restaurants.
Who pays the Soft Drinks Industry Levy?
The sugar tax applies to manufacturers and importers of pre-packaged sugary drinks, meaning retailers don’t pay the tax directly. That doesn’t mean they won’t feel the effects though, and any business selling sugary drinks is likely to deal with higher costs from their suppliers as a result.
Smaller manufacturers (who produce less than one million litres of drinks above the threshold per year) are exempt from having to pay the tax.
How much is the sugar tax?
The tax basically works on a two-tier system, with the rate of tax depending on the exact amount of sugar contained within each drink.
The levy currently applies to drinks with added sugar that contain more than 5g of total sugar per 100ml. For 2026/27 the sugar tax rate is:
- £1.94 per 10 litres of any drink which has between 5g and 8g of sugar per 100ml
- £2.59 per 10 litres of any drink which has 8g or more of sugar per 100ml
From January 2028, though, the minimum threshold for the lower rate of sugar tax will be lowered from 5g of total sugar per 100ml to 4.5g of total sugar per 100ml. Manufacturers will need to reduce sugar levels by this date if they wish to avoid paying the tax.
How will the changes impact my business?
If you’re a manufacturer the you pretty much have two options: reformulate your product so its sugar content is below the lower threshold, or accept that you’ll have to pay the tax. Either way, the cost is high, and so you’ll likely have to pass it on to customers by way of higher prices.
Companies that choose to pay the tax could spend up to £259,000 a year depending on what tier they’re in.
Sugar tax and smaller retailers
If you’re a small business that sells pre-packaged sugary drinks, you could find yourself being charged a lot more by your supplier. This means you may find yourself having to raise prices in order to try and offset the cost without eating into your own profits.
A bigger chain like Starbucks or Costa is more equipped to deal with higher taxes, whereas independent operators with a select number of locations are more likely to struggle with tighter cashflow.
It’s well worth chatting to an accountant about this. They’ll walk you through the process and also ensure you’re operating in the most tax-efficient way possible, claiming everything you’re entitled to.
Find more help in our online accounting hub, and learn more about how to find the right accountant for your business.
