Sugar tax expansion: what it means for dairy and plant-based drinks

The UK Government’s decision to expand the Soft Drinks Industry Levy (SDIL) has set the stage for significant changes across the beverage sector.

Announced in the November 2025 Budget, the policy will extend the levy to pre-packaged milk-based and plant-based drinks from January 1, 2028, while also lowering the sugar threshold from 5g to 4.5g per 100ml.

This move, aimed at tackling childhood obesity and dental health issues, ends long-standing exemptions for categories previously considered nutritionally valuable. For producers, the next three years will be a period of reformulation, negotiation, and strategic adjustment.

Dairy sector: pragmatic acceptance
For traditional dairy producers, the announcement was met with cautious acceptance rather than outright opposition. The Provision Trade Federation (PTF), which represents businesses accounting for around 20% of UK household food expenditure, acknowledged the extension as “unwelcome, but expected.”

Rod Addy, director general of the PTF, explains: “The big development for our members in the dairy sector is the extension of the Soft Drinks Industry Levy to milk-based drinks, which was unwelcome, but expected. PTF members continue to work hard to enable dairy products to contribute to a healthy, balanced diet and we support the need to reduce added sugars in products to combat obesity and dental caries.”

The dairy industry’s relatively calm response stems from a key concession: the introduction of a lactose allowance. Recognising that lactose is a naturally occurring sugar in milk, the government agreed that up to 4.5g per 100ml would not count toward taxable sugar content. This means the levy will apply only to added sugars in dairy drinks, not to intrinsic sugars.

Addy welcomes the adjustment: “We are relieved that the government chose to listen to our arguments and lessen the impact on industry by opting for a reduced lactose allowance of 4.5g per 100ml rather than 4g in products, which will not count towards sugar content for the purpose of drinks tax.”

For dairy producers, this distinction is critical. It allows them to maintain competitiveness while continuing to reduce added sugars in milk-based drinks and yogurts.

Plant-based sector: concerns over fairness
The reaction from the plant-based sector has been markedly different. The Plant-based Food Alliance (PbFA) expressed disappointment, arguing that the policy creates an uneven playing field.

While sweetened dairy drinks benefit from the lactose allowance, sweetened plant-based drinks will be taxed on their total sugar content, including naturally occurring sugars from ingredients such as oats or rice.

The PbFA states: “We are incredibly disappointed with the introduction of a lactose allowance for sweetened milk drinks, with no equivalent to account for the naturally occurring sugars found in sweetened plant-based milk substitute drinks. A sweetened dairy-based product will be taxed less than a sweetened plant-based milk substitute with the same amount of added sugar.”

The Alliance warns that this discrepancy could push plant-based products above price parity with dairy, undermining consumer choice and potentially disadvantaging those who avoid dairy for health, ethical, or environmental reasons. It also highlighted that many plant-based drinks contribute nutritional benefits, such as fibre, vitamins, and unsaturated fats, while typically carrying a lower environmental footprint.

Reformulation challenges
Beyond the policy debate, the practical implications of lowering the sugar threshold are significant. Reformulating products to meet the new 4.5g per 100ml limit is a complex scientific challenge.

Irma Gonzalez, global product manager for sweet taste at Givaudan, explains: “Sugar reduction is a scientific domain that’s extraordinarily complex. When you remove sugar, the complexity and delicacy of a sweet flavour can be lost too. Manufacturers face the huge challenge of creating new and desirable products with less sugar, but without compromising taste—within budget and at scale.”

She noted that alternative sweeteners often introduce issues such as bitterness or aftertaste, requiring additional innovation to mask off-notes and balance flavour. Gonzalez remains optimistic, however: “The reduction of sugar in brands is viable today. True innovation is needed to meet evolving market needs.”

For producers, this means investing in R&D, exploring new sweetening technologies, and working closely with flavour houses to deliver products that meet both regulatory requirements and consumer expectations.

Wider business context
The sugar tax expansion does not exist in isolation. It comes at a time when food and drink businesses are already managing multiple cost pressures, from increases in national insurance and the minimum wage to packaging taxes and Brexit-related trade costs.

Rod Addy of the PTF acknowledges these cumulative challenges: “It still represents increased business costs.”

At the same time, there were some positives in the Budget. The freeze on fuel duty and rail fares offers relief for logistics and commuting costs, while free funding for SME training apprentices under 25 could support workforce development. Nonetheless, the levy adds another layer of complexity to an already demanding operating environment.

Looking ahead to 2028
With implementation set for 2028, producers have a transitional window to reformulate, renegotiate supply chains, and prepare marketing strategies. For dairy, the lactose allowance provides breathing space. For plant-based, the challenge will be to maintain competitiveness while lobbying for policy adjustments.

The debate underscores broader themes shaping the food and drink industry:

• Public health priorities are driving regulatory change.
• Technical innovation is essential to meet new standards without compromising taste.
• Market fairness remains a contested issue, particularly between traditional and alternative categories.

Ultimately, the sugar tax expansion reflects the government’s determination to reduce sugar consumption across all beverage categories. For food and drink professionals, the next three years will be critical in shaping how the industry responds — balancing health imperatives with commercial realities, and ensuring consumers continue to enjoy products that are both nutritious and appealing.