Chancellor of the Exchequer Jeremy Hunt has presented his Autumn Statement to MPs in the House of Commons and confirmed that electric car owners will start paying annual tax on their vehicles from 2025.
Experts have been anticipating for years the introduction of taxation to plug a £35bn “black hole” in government coffers created by electric vehicles, which are exempt from Vehicle Excise Duty (commonly called “road tax”) and the fuel duty on petrol and diesel.
With the sale of new petrol and diesel cars to be banned from 2030, and new hybrids vetoed from 2035, the transport select committee warned in February that there could be “zero revenue for the government from motoring taxation by 2040” without some kind of intervention.
In his autumn statement this morning, the chancellor said he wanted to make motoring taxes “fairer” as sales of electric vehicles take off.
He told the Commons: “Because the Office for Budget Responsibility forecast that 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.”
How much will electric vehicle owners pay in ‘road tax’?
VED will be introduced on not only electric cars but also vans and motorcycles under the plans.
Owners will have to start paying the charge from April 2025, meaning the changes don’t come into effect for more than two years, and the VED system will be the same as for petrol and diesel vehicles, i.e. a charge based on emission for the first year after registration and then a flat rate thereafter.
That means buyers of new electric cars will still get a good deal in the first year of ownership, as the charge is presently just £10. We would expect that to change as EVs replace petrol and diesel cars, though.
From the second year of registration onwards, owners will have to pay the standard rate for petrol and diesel cars, presently £165 a year. Again, the second year rate crept up over time, so it’s a moving goalpost.
Currently, vehicles that cost more than £40,000 attract an additional “Expensive Car Supplement” charge of £355 a year from the second to the sixth year after registration. New electric vehicles will no longer be exempt from this after April 2025.
Will it only affect new electric vehicles?
It’s worth noting that although the charge begins in April 2025, zero emission cars already on the road will also be liable.
Owners of vehicles registered between March 1, 2001 and March 31, 2017 that are currently in Band A, which is currently free, will be charged the Band B rate for petrol and diesel cars of that era, which is currently £20 a year.
For EVs first registered after April 1, 2017, the charge will be the same standard rate as for new cars, which is currently £165.
What will be the VED rates for electric vans and motorcycles?
Under the plans, zero emission vans will move to the rate for petrol and diesel light goods vehicles, currently £290 a year for most vans.
Zero emission motorcycles and tricycles will move to the rate for the smallest engine size, currently £22 a year.
And company car tax rates?
Company car tax rates will remain lower for EVs than petrol and diesel vehicles, to continue to incentivise take up of zero-emission vehicles, but will increase by one percentage point for three years from 2025 up to a maximum appropriate percentage of 5%.
Rates for all other vehicles will also be increased by one percentage point for 2025-26 up to a maximum appropriate percentage of 37%, and will then be fixed in 2026-27 and 2027-28.
What about fuel duty?
There was no mention of plans to reverse the then-Chancellor Rishi Sunak’s 5p per litre cut in fuel duty announced in March, or indeed to make further cuts.
Tax incentives for charging points
The government today also said it would extend the 100% First Year Allowance for electric vehicle chargepoints to March 31, 2025 for corporation tax purposes and April 5, 2025 for income tax purposes, making it more affordable to install charging points for electric vehicles.
It said this will ensure that “the tax system continues to incentivise business investment in charging infrastructure”.
Reaction from the motoring industry
The Chancellor’s announcement received a muted response from motoring organisations with the news not being entirely unexpected.
The RAC said that it was “probably fair” that electric vehicle drivers contribute to the upkeep of roads through the payment of VED after many years of paying no road tax, though cautioned that the government should still leave some tax incentives in place.
“While vehicle excise duty rates are unlikely to be a defining reason for vehicle choice, we believe a first year zero-VED rate benefit should have been retained as a partial incentive,” said Nicholas Lyes, head of roads policy at the RAC, who also welcomed the Chancellor’s decision to keep the company car tax rate on electric vehicles low.
“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.”
The AA was more pessimistic about the Chancellor’s announcement, however, saying that applying road tax to electric cars would “slow the road to electrification”.
“This may delay the environmental benefits and stall the introduction of EVs onto the second-hand car market. Unfortunately the chancellor’s EV taxation actions will dim the incentive to switch to electric vehicles,” said the AA’s president, Edmund King.
The Chancellor’s announcement comes following the scrapping of the £1,500 grant for electric car buyers in June.
Do we still need road pricing?
Many had predicted that the Chancellor’s Autumn Statement would contain more far-reaching taxation measures when it came to motoring, specifically the introduction of “road pricing” whereby drivers pay for using certain roads via tolls or more sophisticated GPS-based pay-per-mile technology. That did not come to pass.
Out of the £35bn expected black hole in finances from the rise of electric vehicles, just £7bn was made up by VED; the rest is collected from fuel duty, meaning there’s a lot more money to find by the Treasury over the coming years.
In 2021, a report by the Tony Blair Institute for Global Change think-tank said that unless the budget shortfall was made up by road pricing, income tax would need to increase by approximately 6p in the pound by 2040.
When Tony Blair’s Labour government first mooted the idea road pricing in 2005, so strong was the backlash that it forced the government to scrap the proposal following the submission of a petition signed by 1.8 million people.
Given how politically toxic the issue of road pricing has, in the past, proven to be, and given the government’s travails in recent months, it may not have seen now as the right time to re-open the subject.
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