Jeremy Hunt said that the move would make the UK’s motoring tax system “fairer” as he looks to plug an impending £7 billion gap in revenue from vehicle tax. The change will see owners of any EV registered since 2001 pay a minimum of £20 per year.
During the Autumn Statement he told the House of Commons: ““Because the OBR [Office for Budget Responsibility] forecast half of all new vehicles will be electric by 2025, to make our motoring tax system fairer I’ve decided that from then, electric vehicles will no longer be exempt from vehicle excise duty.”
Currently, EVs are not subject to annual car tax while new petrol and diesel models are charged a flat rate of £165, with a £10 discount for hybrids. The zero tax rate was viewed as an incentive to encourage drivers to switch to electric cars but threatened to create a growing drop in tax income.
With EV sales soaring and the 2030 ban on new petrol and diesel vehicles getting closer, the Treasury faced an estimated loss of £7bn in VED between now and 2040, on top of a sharp decline in fuel duty income.
Details of the plan reveal that the tax will apply not only to brand new cars registered from 2025 but to any EV registered from 1 April 2017. Previous VED changes have not applied retrospectively.
How much will EV drivers pay?
Under the new tax strategy, any cars registered from 1 April 2025 will be subject to the lowest first-year tax rate, which is currently £10. After that they will be hit with the same flat rate as regular petrol and diesel cars, currently £165. Cars registered 1 April 2017 and 31 March 2025 will also be subject to the standard annual VED charge. Zero emissions vehicles registered between 1 March 2001 and 30 March 2017 will move from tax band A (free) to tax band B (currently £20 per year).
From 2025 EVs will also be subject to the Expensive Car Supplement for the first time. This “premium tax” applies to any car with a list price over £40,000 and means owners pay an additional £355 per year for five years from the car’s second year. Such changes mean the annual tax bill for a new car like the Kia EV6 will rise from £0 per year in 2022 to £520 from 2025.
The Chancellor said tax rates would still be set to incentivise EV ownership, telling MPs: “Company car tax rates will remain lower for electric vehicles and I have listened to industry bodies and I will limit rate increases to 1 percentage point a year for three years from 2025.”
RAC head of policy Nicholas Lyes said: “After many years of paying no car tax at all, it’s probably fair the Government gets owners of electric vehicles to start contributing to the upkeep of major roads from 2025. Vehicle excise duty rates are unlikely to be a defining reason for vehicle choice, so we don’t expect this tax change to have much of an effect on dampening the demand for electric vehicles given the many other cost benefits of running one. The fact that company car tax increases on EVs will be kept low should also keep giving fleets the confidence to go electric which is vital for increasing the overall number of EVs on our roads.
Quentin Willson, founder of the FairCharge campaign group said the statement was a “missed opportunity” to do more to encourage EV uptake. He commented: ”With millions struggling with the cost of living, the best way to help with the cost of motoring would be to get more people into EVs, which enjoy significant total ownership cost advantages over combustion cars.
“It is right that the Chancellor is starting to think about ways to fill the growing fuel duty hole, but introducing VED on EVs without a corresponding increase for combustion cars will reduce incentives to go electric. What’s more, because new car buyers are generally well off, increasing VED on combustion cars, particularly SUVs, would hit the highest earners who drive the most polluting vehicles the hardest. This would have raised revenue while keeping all important incentives to reduce emissions.”
Ian Plummer, director of automotive classified advertising company Auto Trader, predicted that the introduction of VED could put some buyers off EVs. He said: “The Chancellor is clearly looking for revenues, but the prospect of additional running costs will drive more would-be buyers away from EVs when other incentives are being scrapped and high energy bills are eroding the advantages of going electric.
“An excise duty raid is deeply unhelpful and sends the wrong message if we’re to be serious about getting EVs into the mainstream. Drivers can still save £80 every 1,000 miles by going electric, but this hike takes away a big chunk of those savings.”
Jim Holder, editorial director, What Car?, said: “The tax-free status for electric vehicles was always going to come to an end, and What Car?’s research suggests most buyers are already in favour of taxing EVs. A study found just 14.6% feel they should remain tax-free in the future, while 45.1% want to see EVs taxed already.”