Why your electric car will soon be costing more

Zero-emission vehicles are losing tax-exempt status. How will the market react, asks Rachel Millard

Mixed emotions come with the territory of driving an electric car. The satisfaction of being a green pioneer can often be tinged with bouts of “range anxiety” over whether the battery will last for the full journey.

Now a third ingredient can be added to the mix: fears over the rising cost of owning an electric vehicle.

Up until recently, electric cars were exempt from road tax and fuel duty. The incentive helped drive uptake of the vehicles with 456,000 fully electric battery vehicles estimated to be on UK roads. On average, electric vehicle running costs are currently estimated to be £528 cheaper than for petrol cars.

Last month, Jeremy Hunt, the Chancellor, punctured the first hole in the cars’ tax-exempt bubble, announcing that electric cars, vans and motorbikes will pay vehicle excise duty (VED) from April 2025.

Zero-emission cars registered from April 2017 will pay the lowest rate of £10 in the first year, then move to the standard annual rate of £165.

Hunt also removed the exemption for electric vehicles (EVs) from the £355 expensive car supplement, which applies to cars worth £40,000 or more. This will apply to new cars registered after April 2025.

The move is expected to raise £515m in 2025-26, increasing to £1.6bn in 2027-28. Yet it is unlikely to be the final word in taxing electric cars, with state coffers also facing a major hit due to the loss of fuel duty as petrol and diesel cars are phased out.

Fuel duty raised about £26bn per year but this is predicted to fall to below £5bn by the 2040s.

Some form of road pricing – where motorists pay a charge for the miles they drive – has been on the agenda for years. It is now gaining extra attention as a replacement to fuel duty given the looming ban on new petrol and diesel cars from 2030.

“I think there is a general consensus that, given that revenue from fuel tax is going to decline, unless we’re going to have even less money for public services, something else has to go in its place,” says Ben Bradshaw, Labour MP for Exeter and member of the Commons transport select committee, which in February called on the Government to set out plans to replace lost fuel duty and submit them to an independent review. Ten months later, the Government has yet to respond.

“In our report we said the Government really needs to start getting a move on and start looking at this. And rather than doing it piecemeal, come up with a proper policy and a proper strategy now,” Bradshaw adds.

Whitehall sources indicate there are no current plans for a road pricing scheme, given it has now subjected electric vehicles to vehicle excise duty.

Road pricing proved a headache for Sir Tony Blair, who as Labour prime minister in 2007 defended proposals for a national road pricing system, estimated to cost £1.34 a mile in the busiest areas during rush hour.

He insisted it was “not about imposing ‘stealth taxes’ or introducing ‘Big Brother’ surveillance”. Years later, he has not given up: the Tony

‘Given that revenue from fuel tax is going to decline, something else has to go in its place’

‘Should my sister in Devon pay what I do, living within the M25, when she doesn’t have my travel options?’

Blair Institute warned in a report in August 2021 that the current tax system in which EVs pay less tax would be seen as “fundamentally unfair” as EVs start to proliferate, clogging up roads.

Sir Keir Starmer is reported to be taking advice from Sir Tony as he prepares for the next general election.

The Right-wing Policy Exchange think tank also sees merit in a road-pricing system, arguing in a 2021 report that motorists are currently getting a “bad deal” as they pay £40bn in fuel duty and taxes but face endless potholes and low peak time speeds.

Road-pricing is seen as a chance to tackle congestion by, for example, charging drivers more to travel on busy roads during rush hour. This sort of “surge pricing” is in fashion as officials look to cut the burden on overstretched infrastructure.

To head off opposition, Policy Exchange argued the Government should also look at increasing the speed limits on motorways to 80mph in order to “reassure motorists that the key goal is to improve the experience of driving and speed up journeys, rather than burden them with yet another charge”.

Pressure is also coming from the Government’s own advisers, with the Climate Change Committee in June suggesting some form of road pricing, noting that potential approaches could range from a charge per mile based annual odometer checks, to more sophisticated tariffs which would require vehicle tracking devices.

Such measures have always proved controversial, though they may become less so over time. “Any modern car already knows where you are,” argues James Court, chief executive of EVA England, the membership group for EV drivers.

“I have a sister who lives in Devon. Should she be charged the same price per mile that I do living within the M25, when I’ve got a plethora of transport options, and she has none?”

He said he was “surprised” at the Government’s move to start charging electric vehicles at the same rate as petrol ones, describing the charge on expensive cars as the “sting in the tail” given the current upfront costs of electric vehicles.

“At the moment there is not a huge stock of second-hand EV cars,” he says, adding: “It’s a blunt instrument, when really the thing they want to be attacking is road pricing.”

Oliver Rix, partner in the energy advisory practice at Baringa, notes that any road pricing scheme would need to treat all cars equally, to avoid making petrol and diesel models more attractive comparatively. “Today fuel duty acts as a bit of a proxy carbon price,” he says, “you’re paying extra for fossil fuel use.”

“My personal view is that the Government probably has a little bit more time than people think,” to set out any plans to replace fuel duty, according to Stef Lehman, director at the Flint Global advisory group. Yet with EV uptake quickening and huge pressure on the public finances, the issue is unlikely to go away.

A Treasury spokesperson said “all taxes remain under review”.

“The impact of VED changes on the take up of electric vehicles are expected to be minimal when compared with the overall cost of buying a car,” they said. “We continue to incentivise electric vehicles through a range of tax measures and subsidies.”