Electric car owners will have to pay vehicle excise duty, better known as road tax, from 2025, the chancellor has announced.
Industry figures said the imposition of VED could slow the transition to electric cars.
However, drivers of conventional cars could see their running costs increasing far sooner, with a planned rise in fuel duty in March 2023 potentially adding 12p a litre to current petrol and diesel costs.
Office of Budget Responsibility (OBR) documents accompanying the autumn statement projected a £5.7bn uplift in receipts next year, assuming a rise in duty in line with inflation along with the one-year 5p cut from Rishi Sunak’s budget in March coming to an end.
While the OBR shows a potential 23% rise in fuel duty, successive Conservative chancellors have used their budgets to freeze rises in fuel duty since 2011, and Hunt may yet follow suit in the spring.
Hunt did not announce any moves or a wider reform of fuel duty, contrary to some expectations. Fuel duty charged at the pumps raises the bulk of about £35bn in motoring taxes for the Treasury, but that figure is forecast to drop sharply with the transition to electric cars, and officials have said new sources of revenue will be needed.
A system of road pricing, charged to vehicles according to distance driven, is seen by many motoring organisations as the best ultimate replacement, but has long been regarded as politically toxic.
Battery-electric vehicles (EVs) make up an increasing proportion of the cars on UK roads, meaning revenues to the Treasury from both VED and fuel duty are set to decline. The sale of new petrol or diesel cars will be banned in the UK from 2030.
The chancellor, Jeremy Hunt, told the Commons in his autumn statement: “Because the Office of 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.”
Rates of VED vary largely according to emissions and the age of the car, with all zero-emission vehicles currently exempt. EVs will be charged the lowest band for new cars in the first year – currently £10 – and will then pay the same rate as other vehicles. Drivers of the newest diesel or petrol cars typically pay £120-£945 in the first year and then £165 a year for the next five years. More expensive cars are also surcharged, potentially hitting new EVs.
Some incentives would remain for businesses to transition to cleaner vehicles. Hunt said: “Company car tax rates will remain lower for electric vehicles … and I will limit rate increases to 1% a year for three years from 2025.”
Ian Plummer, the director of Auto Trader, said: “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.”
Gill Nowell, the head of EVs at ElectriX, said it was “a disappointing decision but not surprising”, adding: “More work will need to be done to assure drivers that running an electric car remains cheaper than driving a petrol or diesel one, and is also better for the environment.”
The Local Government Association welcomed the move to impose the tax on EV drivers. David Renard, transport spokesperson, said: “Although much less harmful for the environment than petrol and diesel cars, electric vehicles still make a contribution to carbon emissions, congestion and wear and tear on our roads. It’s only fair then that drivers contribute towards these additional costs and help support investment in even lower carbon alternatives such as public transport, buses, cycling and walking.”
