In a significant shift in the UK’s vehicle taxation landscape, major changes to vehicle excise duty (VED) will come into effect on April 1, 2025. These changes, which include the removal of exemptions for electric vehicles (EVs), have raised concerns about their potential impact on consumer confidence and the broader transition to electric driving.
The Treasury's decision to end the exemption means that all EV owners will be required to pay a standard VED rate of £195 for the second year onward after their vehicle is registered. Additionally, new EVs priced over £40,000 will incur a luxury car tax of £425 annually for the subsequent five years. This change was first announced by then-Chancellor Jeremy Hunt under the Conservative government in November 2022 but is now being implemented by the Labour government.
According to research from the Energy and Climate Intelligence Unit (ECIU), owners of the top ten best-selling EVs will still benefit from average annual savings of nearly £1,200 over the vehicle’s lifetime, primarily due to the lower running costs associated with electricity compared to petrol. However, the new tax structure has sparked fears that it could deter potential buyers from making the switch to electric vehicles.
Colin Walker, head of transport at ECIU, expressed concerns about the timing of these tax increases. He stated, "The government is risking complacency if it is seen to be increasing the cost of running an EV at such a critical time in the country’s EV transition. These new taxes could undermine consumer confidence and hold families back from making the move to electric driving, leaving them stuck paying a petrol premium to run more expensive combustion engine cars."
In light of these changes, Ginny Buckley, founder of the EV buying advice website Electrifying.com, criticized the luxury car tax threshold of £40,000, calling it "outdated" and "unfairly penalizes EVs due to their higher upfront costs." She pointed out that many family-sized electric cars, such as the Kia e-Niro or Volkswagen ID.3, could be subject to a tax originally intended for luxury vehicles, potentially leading to thousands of pounds in additional costs over six years.
As the UK government pushes for a transition to electric and zero-emission vehicles, the zero-emission vehicles (ZEV) mandate remains in place, requiring a minimum proportion of new cars and vans sold by each manufacturer to be zero emission. This policy has been credited with driving competition among manufacturers and reducing EV prices.
However, the recent changes to VED raise questions about the government’s commitment to encouraging the adoption of electric vehicles. While EV owners will now face a £10 charge for the first year after registration, the subsequent annual fee of £195 is a stark departure from the previous exemption.
Meanwhile, petrol and diesel vehicle owners will also see an increase in their tax rates, particularly those with larger, more polluting vehicles, who will experience a doubling of their first-year charges. For example, a new Volkswagen Golf R petrol model has a first-year rate of £220, with subsequent years costing £190 annually.
Public sentiment appears divided on the issue of a pay-per-mile car tax system, which was previously proposed but ultimately scrapped. Financial experts suggest that older drivers, who typically drive fewer miles, might have benefitted from such a system. Bradley Post, Managing Director of tax specialists RIFT, noted that the pay-per-mile tax was intended to replace fuel duty revenues lost as more drivers transitioned to electric vehicles.
Data from care alarm provider Taking Care indicates that drivers over 70 years old travel an average of just 1,665 miles per year, suggesting that they could have seen significant savings under a pay-per-mile system. Recent analysis also revealed that drivers over the age of 55 clock up 28% fewer miles than other age groups, making them more likely to favor a pay-per-mile scheme.
A YouGov poll involving 2,000 UK adults indicated that only 26% of drivers support a pay-per-mile scheme. However, among those aged 55 and above, support rises to 33%, compared to just 19% of younger drivers aged 18 to 34. This demographic shift indicates a potential market for tailored tax strategies that could benefit older drivers.
With the new VED rules set to take effect, the government is analyzing feedback from a recent consultation on proposed changes to the ZEV mandate rules, which includes making it easier for non-compliant manufacturers to avoid fines. The outcome of this analysis could further influence the future of electric vehicle taxation in the UK.
As the government navigates these complex changes, the balance between encouraging the adoption of electric vehicles and ensuring fiscal stability remains a key challenge. The recent tax adjustments have sparked widespread debate about the future of motoring in the UK, especially as the country aims to meet its climate commitments.
While the government maintains that the shift to electric vehicles is crucial for tackling climate change, the immediate financial implications for consumers could prove to be a significant hurdle in achieving broader acceptance of EVs. As the landscape of vehicle taxation continues to evolve, stakeholders from various sectors will be watching closely to see how these changes impact consumer behavior and the future of electric driving in the UK.
