Story · United Kingdom
UK Soft Drinks Industry Levy threshold will fall to 4.5g of added sugar per 100ml
13 July 2026
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.
Use it in an exam
Chain
Sugar-related health costs and imperfect consumer decisions → levy makes high-sugar formulations more costly → firms reformulate and/or pass on some tax → sugar content or consumption may fall → external costs and welfare loss may fall
Evaluation
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.
Useful diagram: Demerit-good / negative consumption externality diagram showing MPB above MSB, with the levy used to reduce overconsumption
Sources and evidence 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.