Rachel-Reeves
Is Rachel Reeves' 'Milkshake Tax' really the solution to closing a £20bn budget gap? AFP News

KEY POINTS

  • Rachel Reeves may remove dairy exemptions from the sugar levy to raise up to £100m toward the UK's £20bn budget gap
  • The plan would subject milkshakes and sweetened lattes to the Soft Drinks Industry Levy starting in April 2027
  • Critics say the proposal will increase business costs while doing little to meaningfully reduce obesity or close the fiscal gap

Chancellor Rachel Reeves is preparing to remove long-standing dairy exemptions from the UK's sugar levy, creating what critics have labelled a 'milkshake tax', as she seeks new ways to fill the nation's £20bn budget shortfall.

The proposed shift would extend the Soft Drinks Industry Levy, which currently applies to high-sugar drinks like Coca-Cola and Pepsi, to sweetened milkshakes, frappés, flavoured lattes and some dairy alternatives. According to reports, the change could raise up to £100 million annually and would take effect from April 2027.

The move comes shortly after Reeves abandoned her expected plan to raise income tax — a reversal prompted by updated Office for Budget Responsibility analysis that reduced the estimated fiscal gap from £30bn to £20bn.

Why Milkshakes Are Being Pulled Into the Sugar Levy

The sugar tax — formally the Soft Drinks Industry Levy (SDIL) — was introduced in 2018 to pressure manufacturers to reduce sugar content. As background, the levy charges producers 18p per litre on drinks containing 5g of sugar or more per 100ml.

Bottles and cans of Coca Cola imported from Japan and China together with other soft drinks containers are displayed for sale in Vladivostok
The Soft Drinks Industry Levy is a newly introduced tax targeting manufacturers and importers of soft drinks that contain added sugar. It’s structured in two tiers: a lower levy applies to drinks with at least 5 g of added sugar per 100 ml, and a higher levy applies to those with 8 g or more per 100 ml. Reuters

Milk-based drinks were originally exempt due to concerns about calcium intake, but government analysis now suggests these products contribute only 3.5% of young people's calcium consumption, weakening the original justification for shielding them.

By removing the exemption, the government hopes manufacturers will reformulate products just as they did after 2018 — when 89% of soft drinks ended up below the taxable sugar threshold.

Backlash From Businesses and MPs

Opposition to the proposal has been fierce.

Milkshake Milkshake
Rachel Reeve's 'Milkshake Tax' may mean milk-based drinks are to lose long-standing sugar tax exemption. Photo by Lucio Panerai via Pexels

Shadow Chancellor Mel Stride criticised the move as punishing businesses that had already reduced sugar responsibly: 'It will see businesses that played by the rules punished — all to save Rachel Reeves's skin'.

Industry bodies have warned that a sudden expansion of the levy could drive up production costs, ultimately raising prices for consumers in an already strained food economy.

Commentary on X has also been scathing, dismissing the measure as ineffective and politically desperate:

As of now, the Treasury has declined to comment publicly on the proposed expansion.

Can a Milkshake Tax Really Help Close a £20bn Gap?

Economists widely note that £100m is a fraction of the amount needed — but the government appears to be adopting a 'multi-measure' approach after shelving a politically sensitive income tax rise.

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That strategy means several small revenue-raising policies must work together to support the fiscal plan. Critics call this a 'patchwork fix,' but supporters argue it spreads the impact fairly and pushes manufacturers toward healthier formulations.

Reeves now faces the dual challenge of stabilising public finances while defending a tax that — despite its modest revenue potential — has become a symbolic flashpoint in the debate over health, fairness and fiscal responsibility.

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