Chancellor Rachel Reeves faces a £167million shortfall in tobacco tax revenues as British smokers increasingly turn to illicit cigarettes.
HM Revenue and Customs (HMRC) figures reveal that tobacco receipts between April 2025 and February 2026 plummeted by £500million, representing a six per cent decline compared with the previous year.
However, the drop in actual smoking rates tells a different story entirely.
During the same period, the number of Britons lighting up fell by just four per cent.
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This two percentage point gap suggests that rather than quitting, smokers are simply abandoning duty-paid products in favour of black market alternatives.
The discrepancy points to a growing crisis for the Treasury as elevated duties appear to be pushing consumers towards criminal suppliers rather than deterring tobacco use altogether.
Shadow Business Secretary Andrew Griffith issued a warning to the Chancellor, urging her to reconsider further duty increases that risk driving more British consumers into the hands of criminal networks.
He told GB News: "Labour's tobacco tax grab is not working. The impact of illiberal policies to force people to stub out their cigarettes forever is costing Britain cash it doesn't have.
Tobacco tax shortfall hits £167million as smokers turn to illicit cigarettes
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"This Government talks about protecting the high street, but their sky-high taxes are driving customers away from local shops and towards black market packets and duty free bargains."
The frontbencher's comments follow warnings delivered to Ms Reeves prior to her November Budget that her tobacco duty proposals would fuel the illicit trade.
The situation looks set to worsen considerably come October, when a double blow awaits tobacco purchasers.
From the first of that month, duties will rise by two per cent above the rate of inflation, whilst an additional one-off levy of £2.20 will be applied to every 100 cigarettes sold.
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Mr Griffith told The People's Channel the chancellor should reconsider her tax raid
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The scale of the existing black market problem is already concerning industry experts.
Research conducted by IPSOS last year estimated that half of all cigarettes consumed across Britain are now illicit.
Meanwhile, a KPMG report published in 2025 calculated that illegal tobacco cost the Treasury some £3.15billion in lost revenue during 2024 alone.
Experts caution that the forthcoming October increases will only accelerate the exodus of smokers towards untaxed products.
The forthcoming tax increases will push Britain closer to the Australian model, where tobacco duties rank among the highest globally.
Australians are cautioning the British Government not to follow their lead
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Across the Tasman, the consequences have proved severe, with illegal tobacco retailers proliferating and organised crime gangs waging turf wars on suburban high streets.
Australian authorities have been forced to respond by equipping investigators with enhanced powers including wire taps and strengthened asset seizure capabilities.
Rohan Pike, a former Australian Border Force officer, said: "Australia should serve as a cautionary tale for Rachel Reeves.
"We raised tobacco taxes repeatedly, handed the black market to organised criminal gangs on a plate, and now face a massive enforcement bill in a futile attempt to claw it back.
"The UK Chancellor is making the same mistake in slow motion. Every time she hikes tobacco duty, she isn't hurting the criminals - she's funding them. If she wants to avoid Australia's fate, she must prevent the problem, not fuel it."