Chancellor Jeremy Hunt’s most controversial Autumn Statement announcement for motorists was the ending of VED exemption for electric cars, with owners forced to pay road tax from April 2025
The cost of running an electric car is set to rise dramatically from 2025 after Chancellor Jeremy Hunt announced today that zero-emission vehicles will lose exemption from road tax within three years.
In his Autumn Statement, Mr Hunt said changes to the existing Vehicle Excise Duty (VED) system will be needed from April 2025 to make motoring taxes ‘fairer’.
Details outlined in the Treasury document confirmed that all EV drivers will retrospectively be stung, with most existing EV owners forced to pay £165-a-year in VED – and the majority of new battery car buyers paying £520 annually for five years.
In a second blow to EV drivers, the Chancellor’s confirmation that the Energy Price Guarantee cap for a typical household will increase next April means the cost to charge a battery car will also go up within months.
For drivers of petrol and diesel cars there was – ominously – no mention of fuel duty, casting major doubts over any potential extension to the 12-month 5p-a-litre fuel duty cut introduced in March, and potentially opening the door for a substantial hike in fuel taxation next year.
Here are the four major talking points from today’s statement that affects motorists…
1. Electric cars owners to pay VED from 2025
The Chancellor’s most controversial announcement is the decision to make electric car owners pay Vehicle Excise Duty (VED) – colloquially referred to as car tax – for the first time from 1 April 2025.
In Thursday’s address, Jeremy Hunt said: ‘Because the OBR [Office for Budget Responsibility] forecasts 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.’
Impact of VED sting on existing and new EV drivers
– Owners of the ‘older’ electric cars on the road to pay £20 per year and likely hit petrols and diesels
Drivers of older electric cars – those registered before April 2017 – will be forced to pay £20-a-year in Vehicle Excise Duty from April 2025 onwards.
With sales of battery cars having barely taken off by 2017, this change will impact only a tiny fraction of the nation’s 600,000 EV owners.
This could also mean that any sub-100g/km CO2 cars registered before 2017 that also qualified for £0 ‘Band A’ VED could also be moved to Band B, like electric cars will do.
This will include most hybrids and lots of small petrol and diesel models, meaning owners of these cars will likely also face £20-a-year taxation.
– Owners of recently-bought EVs will be stung £165-a-year
Mr Hunt’s changes to the VED system for electric cars will strike the wallets of owners of the latest battery vehicles, who likely bought them on the premise that they offered cheaper running costs, including VED exemption.
But that will all change in 2025. Those driving models registered between 1 April 2017 and 30 March 2025 will be forced to pay the same ‘standard rate’ of VED levied on petrol and diesel models.
Currently this stands at £165 per annum, though car tax rates are subject to yearly increases in line with RPI and therefore could go up by 2025.
– Buyers of brand new EVs to pay as much as £520 per annum for 5 years
Mr Hunt’s VED reform will have the biggest impact on buyers of new electric cars.
Any new model registered from 1 April 2025 will be liable to pay the lowest ‘first year rate’ of VED – also known as the ‘showroom tax’ – which currently stands at £10 for the first 12 months.
From the second year, they will move to the ‘standard rate’, currently £165 a year.
However, where the Chancellor’s VED changes really hammer electric car buyers is the ‘Expensive Car Supplement’ levied on all new models above £40,000, for which EVs have always been exempt… but not from 2025.
It means buyers of £40k-plus EVs will face an additional £355-a-year charge on top of the standard rate for five years – that’s £520 in total per annum, or £2,600 if you keep the vehicle until it is six years old.
With very few electric cars on the market today priced below £40,000, this supplementary tax will hit most new battery models entering the market. The cheapest Tesla, for instance, currently costs £48,500.
– What about other electric vehicle types?
The Treasury confirmed that zero emission vans will move to the rate for petrol and diesel models from 1 April 2025, which is currently £290-a-year.
Zero emission motorcycles and tricycles will move to the rate for the smallest combustion engine size, which today stands at £22 a year.
Discounts provided to owners of hybrids will also be terminated, bringing them in line with petrol, diesel and electric vehicles.
Mr Hunt said electric car owners will be forced to pay VED from 2025 in a bid to ‘make our motoring tax system fairer’
Why does the Government need to start taxing EV owners?
As the nation’s car parc becomes increasingly electrified, the Treasury is set to miss out on two lucrative motoring taxation streams, with electric car owners not only avoiding annual VED but also not paying duty on fuel as petrol and diesel drivers do.
This is expected to create an annual revenue black hole of around £35bn a year when more drivers switch to electric cars by the end of the decade. However, VED contributes to just £7bn of this total, with the vast majority of funds raised by tax on fossil fuels.
Without making changes to VED, the loss in motoring taxation is predicted to cost the exchequer around £1bn a year by 2025.
While this represents not a huge sum, forcing electric car owners to pay tax now is seen as a first step towards introducing future taxes that can be levied on zero-emission vehicles in the future.
This would likely be in the form of ‘road pricing’, which is a pay-per-mile taxation system – a scheme that has been backed by the Transport Select Committee with MPs calling it ‘one of the best fiscal changes’ the government can make to retain revenues from drivers in April 2021.
Is taxing the greenest cars on our roads ‘fair’? ROB HULL on the arguments for and against…
The move to end VED exemption for electric cars will undoubtedly split opinion.
Those arguing against EV taxation will point out that exiting owners would have bought their battery cars on the premise that they would be cheaper to run.
And these drivers are already paying a relatively high price to go green.
Battery-powered cars cost a substantial premium over an equivalent petrol or diesel, and they have recently become far more expensive to charge as a result of soaring domestic energy bills – which are due to rise again next year (read more about that below).
Let’s also not forget that – like with diesel cars at the turn of the century – the Government had heavily incentivised the uptake of EVs as part of its wider bid to meet clean air targets going forward. But in recent months have started to whittle them away.
This includes the withdrawal of the Electric Vehicle Homecharge Scheme in March, followed by the early termination of the Plug-in Car Grant in June, which has made installing a charging device and buying an electric vehicle more expensive.
While many might have expected some form of taxation on new electric models from 2025, to retrospectively punish motorists who have already gone green will be a bitter pill for them to swallow.
And measures will be even tougher for new EV buyers to stomach; annual tax payments of £520 over for years for a £40,000 EV will feel grossly unfair when a buyer of a heavily-polluting new petrol or diesel model costing £39,999 won’t have to pay nearly as much in tax.
However, the arguments in favour of taxing EVs also stand up.
Based on the existing demographic of electric car owners in Britain, introducing VED will be a tax predominately on higher earners.
Electric cars are most commonly owned by affluent types who – some could argue – shouldn’t be exempt from paying to use the road in their expensive vehicles.
There’s also the fact that heavy electric vehicles cause more damage to our roads; hulking SUV models like the Audi e-tron, BMW iX and Mercedes EQS, tip the scale at between 2.5 and 2.8 tonnes. With revenue from VED used to repair our road network, you could argue that drivers of these cars should contribute towards raising funds for road upkeep.
Will forcing EV owners to pay VED derail appetite for greener cars? The motor industry reacts
RAC head of roads policy Nicholas Lyes said making electric car drivers pay VED is ‘potentially a landmark moment’ that is ‘probably fair’ to ensure EV owners are contributing to the upkeep of our road network.
‘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,’ he told us.
‘We estimate around 550,000 battery electric vehicles on the road now will be affected by the tax change in 2025, in addition to those that will be newly registered between now and then.’
Though not everyone is in agreement with the decision.
AA president, Edmund King, said it will ‘dim the incentive to switch to EVs’ and ‘slow the road to electrification’.
Ben Nelmes, CEO at think tank New AutoMotive claimed the Chancellor’s ‘heavy-handed approach risks choking-off growth in EV sales’.
Sue Robinson, chief executive of the National Franchised Dealers Association, agrees, stating that the decision made today ‘risks disincentivising families from making the transition’ to an electric car.
Ryan Fulthorpe, from comparison website Go.Compare, described the Chancellor’s announced as a ‘real blow’ for electric vehicle drivers, adding: ‘To increase the running costs of an EV seems counter-intuitive, and could ultimately slow the growth of this market.’
Ginny Buckley, the founder and CEO of EV website Electrifying.com, said most electric car drivers ‘wouldn’t object to paying tax’ if the revenue raised is put towards bolstering charging infrastructure.
2. What about fuel duty?
Fuel duty is commonly an issue addressed in March Budget Statements, so its omission from Mr Hunt’s speech and the Treasury document today shouldn’t come as a huge surprise.
That said, the 5p-a-litre cut introduced in March by former Chancellor and now PM, Rishi Sunak, to ease the burden of rising fuel prices was widely expected to be mentioned. Failure to reference it likely means it won’t be cut short, but also won’t remain beyond March 2023.
Fuel duty was cut in March by 5p a litre by former Chancellor – now PM – Rishi Sunak in an effort to protect motorists from soaring pump prices. Today, Mr Hunt failed to acknowledge if this would be extended. On the contrary, OBR documents hint that the Government is considering a huge hike in fuel taxation next year
With the Chancellor looking to raise revenues from tax, fuel duty could appear as a potential easy target for Mr Hunt next year.
Before the 5p cut in March, fuel duty had been frozen at 57.95p-a-litre every year since 2011.
Yet OBR documents also released today state that a ‘planned’ 23 per cent increase in fuel duty in line with RPI inflation next year could generate £5.7bn in additional annual receipts. It would ultimately force the price of petrol and diesel some 12p-a-litre higher in taxation alone.
While prices have come down from record levels earlier in the year, a hike in fuel tax would prove hugely unpopular among hard-up motorists who have faced huge petrol and diesel bills throughout 2022.
Commenting on a potential hike to fuel duty next year, Steve Gooding, director of the RAC Foundation, said the OBR’s reference by no means ‘constitutes a commitment’, but the very fact that ministers are contemplating such an increase will ’cause consternation amongst millions of drivers and businesses’.
He said: ‘Unless the Chancellor’s crystal ball is predicting a significant fall in the barrel price of oil one has to wonder how such an increase would help with the squeeze on household budgets and the desire to stimulate rather than stifle growth.’
It’s also worth looking beyond the hysteria of some media coverage and pay attention to the current average price of fuel.
Without the 5p-a-litre cut to fuel duty, petrol would be above 169.2p and diesel over 193.4p. When Rishi Sunak instigated the cut in March, both fuels were cheaper – 167.3p for unleaded and 179.7p for diesel.
To remove a duty cut and then hike taxation on fuel by 23 per cent seems extremely unlikely, and will certainly face a backlash from Tory MPs battling to keep the cost at forecourts low.
The RAC’s Nicholas Lyes added: ‘The Government has always made a big deal of cancelling duty rises in the past and will face colossal pressure to do the same next year – after all, a rise of these proportions would heap yet more misery on the millions of households that depend on their vehicles, most of whom will just endured one of the costliest winters on record.’
3. Cost to charge an electric car at home to rise again next year
The increase to the cap on average energy bills as part of the Energy Price Guarantee from April next year will ultimately push EV charging prices higher again in 2023
Among the raft of tax increases announced today, the Chancellor also confirmed the cap on average energy bills will rise from £2,500 to £3,000 per year from April.
The adjustment to the energy price guarantee next year means electricity costs for a household on a default tariff paying via direct debit will increase above the current average of 34p per kilowatt hour.
At the existing average rate, to fully charge an average-size family electric car (Volkswagen ID.3 with a 58kW battery) costs £19.80. Annually, that works out at an annual bill of £752.
This will ultimately rise next year as the cap on domestic energy prices is lifted again.
4. Electric cars benefit from low company car tax rates but only until 2028
One of the biggest drivers of electric vehicle registrations in recent years has been low benefit-in-kind company car tax – and this theme will continue with BiK not rising above 5 per cent before 2028, the Chancellor confirmed.
He said: ‘Company car tax rates will remain lower for electric vehicles, and I’ve listened to industry bodies and will limit rate increases to one percentage point a year for three years from 2025.’
This means BIK on electric cars will rise from 2 per cent to 3 per cent in 2025/26, 4 per cent in 2026/27 and 5 per cent the following financial year. Whether the low rates will remain beyond 2028 remains to be seen.
This will continue to make EVs extremely attractive to business drivers and those able to access salary sacrifice schemes, who otherwise currently face paying up to a maximum of 37 per cent in BIK for a petrol and diesel car. Some diesels also attract an extra 4 per cent supplement.
Nicholas Lyes from the RAC said: ‘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.’