Four ways the Autumn Statement affects motorists and electric cars

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.’

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.

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.

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: ‘Although this doesn’t constitute a commitment, the very fact that ministers are contemplating such an increase will cause consternation amongst millions of drivers and businesses.

‘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.’

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

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 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.’