How does the sugar tax impact businesses?

The sugar tax, formally known as the soft drinks industry levy (SDIL), impacts businesses that sell or import sugary drinks. Affected businesses either absorb the cost, pass it on to customers with higher prices, or reformulate their product to avoid the tax entirely.

The government looks set to tweak the guidelines to include more products in the SDIL, such as dairy or non-dairy milk-based drinks. There are also plans to reduce the maximum amount of sugar allowed in drinks before facing the sugar tax.

But will small businesses be exempt? And how much will businesses need to pay under the new rules?

How does the sugar tax work?

The sugar tax is placed on manufacturers and importers of pre-packaged sugary drinks.

It’s a two-tiered system with different rates depending on how much sugar the drinks contain:

Sugar content	Tax rate
5g to 8g of sugar per 100ml	£1.94 per 10 litres
8g or more of sugar per 100ml	£2.59 per 10 litres

The SDIL is mainly designed to target soft drinks. That’s why there’s currently a lot of exemptions to the tax, like:

drinks with less than 5g of total sugar per 100ml
pure fruit juices and vegetable juices
milk and milk-based drinks (though this is currently under review)
milk substitute drinks (also under review)
alcohol-free beer and wine
drinks for medicinal or specific dietary purposes
powdered drinks
liquid drink flavourings

Small producers are also exempt from the tax, regardless of how much sugar is in their product.

The rate of the tax is also adjusted in line with inflation, with the most recent rise coming in April 2025.

What is the impact of the sugar tax on businesses?

To avoid the tax entirely, many businesses decided to reformulate their drinks to come under the 5g limit. Or, as Coca Cola did ahead of the tax change, some producers chose to reduce the size of their drink while keeping the recipe the same.

The government estimates that 89 per cent of soft drinks are not taxed because of the adjustments made by manufacturers since 2018.

But with the SDIL under review, and potentially stricter guidelines on the way, the impact could become more significant.

What are the government’s proposed changes to the sugar tax?

The government is looking to go further with the sugar tax by reducing the maximum limit from 5g to 8g of sugar per 100ml to 4.9g to 7.9g per 100ml – and including some products that were previously exempt.

Pre-packed milk and milk-based drinks, like milkshakes and lattes are two products the government is thinking about including in the SDIL. Introducing a ‘lactose allowance’ that will account for the natural sugars in milk.

There are also plans to target both milk and plant-based products that have ‘added sugars’ beyond the natural ones.

Why are the government making changes to the sugar tax?

Originally introduced in 2018 to promote healthier eating habits in children, the sugar tax is reported to have made a positive impact. This increased regulation on sugary drinks is meant to encourage companies to reduce the sugar in their products further.

But it’s also made £1.9 billion for the government since its introduction in 2018, according to government statistics. And a further expansion of the SDIL could bring in additional revenue for the government.

How could these changes affect businesses?

For larger companies, these changes could be significant. As many manufacturers reformulated their products to be below the 5g threshold, reducing the limit further would mean two things: either reformulate the product to be below the new limit, or pay the tax.

The cost of either of these outcomes could be high. Back in 2018, Irn Bru producers AG Barr spent £1.4 million reformulating their drinks to avoid the SDIL.

Companies that choose to pay the sugar tax could spend up to £259,000 a year depending on what tier they’re in.

But for small businesses, nothing seems to be changing. Small producers, which are manufacturers that make less than one million litres of liable drinks a year, are not currently set to be included in the SDIL.