Starting in 2025, electric vehicle (EV) owners will be subject to vehicle excise duty (VED), commonly known as road tax, as announced by the chancellor. This move has raised concerns within the industry about its potential to hinder the transition to electric cars.
Meanwhile, owners of traditional vehicles may face an earlier increase in running costs, with a planned hike in fuel duty in March 2023 possibly adding 12p per litre to current petrol and diesel prices.
The Office of Budget Responsibility (OBR) forecasts a £5.7 billion increase in receipts next year, assuming a duty rise aligned with inflation and the expiration of the one-year 5p cut implemented in Rishi Sunak’s previous budget.
Although the OBR predicts a possible 23% surge in fuel duty, successive Conservative chancellors have consistently frozen duty hikes since 2011. It remains to be seen if Hunt will continue this trend in the upcoming spring budget.
Hunt’s autumn statement did not unveil any immediate changes or broader reforms regarding fuel duty, contrary to some expectations. However, officials acknowledge that as electric vehicles become more prevalent on UK roads, the Treasury’s revenue from VED and fuel duty will decline substantially. Consequently, new revenue streams will need to be explored.
Many motoring organizations view a system of road pricing based on distance traveled as the ideal long-term replacement for current motoring taxes. Yet, implementing such a system has historically been politically sensitive.
As the proportion of battery-electric vehicles (EVs) on UK roads continues to rise, revenue to the Treasury from both VED and fuel duty is expected to decrease. Furthermore, the UK’s impending ban on the sale of new petrol and diesel cars by 2030 adds urgency to this fiscal challenge.
Chancellor Jeremy Hunt announced in his autumn statement: “Due to the Office of Budget Responsibility’s forecast that half of all new vehicles will be electric by 2025, I’ve decided that electric vehicles will no longer be exempt from vehicle excise duty to ensure fairness in our motoring tax system.”
VED rates currently vary based on emissions and vehicle age, with zero-emission vehicles enjoying exemption. EVs will initially be charged the lowest band for new cars – currently £10 – before transitioning to standard rates. This change may affect the attractiveness of EVs, particularly as more expensive models face additional surcharges.
Despite these adjustments, some incentives for businesses to adopt cleaner vehicles will persist. Hunt stated, “Company car tax rates will remain lower for electric vehicles, and I will limit rate increases to 1% annually for three years starting in 2025.”
Industry reactions to the VED imposition on EVs have been mixed. While some express disappointment, acknowledging the challenge of maintaining EV affordability and environmental benefits, others welcome the move as a fair contribution toward road-related costs.
In summary, the introduction of VED for electric vehicles marks a significant shift in the UK’s motoring tax landscape, prompting both industry concerns and acknowledgment of the need for fiscal adaptation in the face of evolving transportation technologies.