EconToMarks Deep Dive · 13 July 2026
UK Soft Drinks Industry Levy threshold will fall to 4.5g of added sugar per 100ml
HMRC confirmed that from 1 January 2028 the Soft Drinks Industry Levy threshold will fall from 5g to 4.5g of added sugar per 100ml, while exemptions for milk-based and milk-substitute drinks will be removed. It is a strong market-failure case because the government expects firms to respond by reformulating products, so the intervention changes incentives before many consumers ever pay a higher price.
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What happened
The UK government published draft changes to the Soft Drinks Industry Levy on 13 July 2026. From 1 January 2028, packaged drinks with at least 4.5g of added sugar per 100ml can enter the levy rather than the current 5g threshold, and milk-based and milk-substitute exemptions will be removed. HMRC says the objective is to reduce added sugar in soft drinks by strengthening firms' incentive to reformulate.
Why it matters
Sugary drinks can be used to analyse demerit goods, information and behavioural failures, negative consumption externalities and indirect taxation. A levy can raise the private cost of supplying high-sugar drinks, but firms can avoid part of the tax by reformulating. That makes this case especially useful for explaining how government intervention can alter producer incentives rather than simply shifting a tax onto consumers.
Relevant theory
Connect the event to the syllabus.
Key evidence
Lower sugar threshold
From 1 January 2028, the levy threshold will fall from 5g to 4.5g of added sugar per 100ml.
Expected reformulation response
HMRC estimates that only an additional 4% of soft-drink sales will actually pay the levy after accounting for expected reformulation.
Share affected by the rule change
HMRC says the changes apply to approximately 11% of soft-drink sales, although many affected firms may reformulate before the rules take effect.
Revenue effect
The certified Exchequer effect is forecast to rise to about £40 million a year from 2028-29 through 2030-31, reinforcing that revenue is not the only policy objective.
Best diagram
Demerit-good / negative consumption externality diagram showing MPB above MSB, with the levy used to reduce overconsumption
- 1Draw quantity of sugary drinks on the horizontal axis and costs/benefits on the vertical axis.
- 2Show marginal private benefit above marginal social benefit to represent a negative consumption externality or wider social cost from overconsumption.
- 3Mark the free-market quantity to the right of the socially efficient quantity and shade the welfare-loss area.
- 4Explain that the levy is intended to reduce the gap by changing the effective price/cost of high-sugar products and, importantly in this case, by encouraging reformulation.
- 5Do not claim the policy removes the externality completely; the diagram shows the direction of correction, while the actual size depends on behavioural responses.
Chain of analysis
Step 1
Consumption of high-sugar drinks may create costs not fully reflected in the market price and consumers may underestimate long-run health costs.
Step 2
The government lowers the levy threshold, increasing the expected cost of leaving products above the new sugar limit.
Step 3
Producers can respond by reformulating, accepting the levy, reducing margins or passing some cost into prices.
Step 4
Reformulation lowers sugar content without requiring a large retail-price change, while a price rise can also reduce quantity demanded if demand is price elastic enough.
Step 5
Lower sugar content or lower consumption can reduce the market-failure gap and associated external costs.
Step 6
The welfare gain is larger when the behavioural response is strong and the administrative or substitution costs are limited.
Counter-case
When might the main chain weaken?
Use these conditions to challenge the initial mechanism rather than assuming the effect is automatic.
Reformulation weakens a simple tax-incidence story
HMRC expects only an additional 4% of sales to pay the levy after reformulation. That means the most important effect may be firms changing product composition rather than consumers facing a large price increase.
Elasticity and substitution
If consumers can switch easily to lower-sugar or untaxed drinks, consumption of high-sugar products may fall substantially. If they switch to other unhealthy products, the wider health benefit may be smaller.
Government failure risk
The optimal tax is difficult to calculate because the size of the external cost and information failure is uncertain. A poorly calibrated threshold could impose compliance costs without producing a proportionate welfare gain.
Distribution and producer size
Tax incidence can differ across consumers and firms, while small producers below the statutory production threshold remain exempt. The competitive effect therefore need not be identical across the market.
Judgement
The policy may work mainly by changing producer behaviour rather than by raising retail prices: HMRC expects only an additional 4% of soft-drink sales to pay the levy after expected reformulation. The final welfare effect depends on reformulation, demand elasticity, substitution, tax incidence and how accurately the levy reflects the social cost.
Use it in a 12-marker
Use one or two precise pieces of evidence, build a clear causal chain from the case, then test the size or certainty of the effect with one focused condition.
Use it in a 15-marker
Use one or two pieces of the key evidence, explain the mechanism clearly, and use the diagram to anchor the causal chain. Keep evaluation focused on the condition in the judgement rather than adding unrelated points.
Use it in a 25-marker
Use the 5g-to-4.5g threshold change as precise application, then explain the market failure before discussing the levy. The strongest evaluation is that HMRC expects reformulation to prevent most newly affected sales from actually paying the tax: this shows why indirect taxes can change producer incentives as well as consumer prices. Finish by judging the policy on the size of the behavioural response, substitution and whether the levy approximates the social cost.
Practice question
Evaluate the effectiveness of indirect taxation in correcting market failure caused by the consumption of demerit goods.
Sources and update note
Policy facts and impact estimates are taken from HM Revenue & Customs' July 2026 Soft Drinks Industry Levy policy paper. The externality, elasticity and welfare mechanisms are economic analysis rather than guaranteed outcomes.