Electric vehicles tax ‘must be fair, simple and sustainability-driven’

Tax specialist Penny Simmons of Pinsent Masons was commenting amidst reports that UK chancellor Rachel Reeves is considering introducing a ‘three-pence-per-mile’ charge and other road taxes on electric vehicles in the upcoming Budget later this month.

Currently, fuel duty, imposed on petrol- and diesel-powered vehicles, raises between £24 billion and £25bn for the UK economy each year. However, government plans to phase out these vehicles and replace them with electric vehicles mean that tax take is expected to fall over the coming years.

UK automotive manufacturers face a zero emission vehicle (ZEV) mandate, under which they will face increasing requirements to meet ZEV quotas for new vehicle sales each year up to 100% by 2035.

Even before the ZEV mandate was introduced in January 2024, the number of new electric vehicle sales in the UK each year had been rising. According to trade body the Society of Motor Manufacturers, this year, up to the end of October, there have been 386,244 battery electric vehicles sold. In 2021, there were fewer than 200,000 annual electric car registrations. There are now more than 1.7 million fully electric vehicles in the UK. A further 3.6 million vehicles are either plug-in hybrids or hybrid electric vehicles.

According to a report by the Financial Times, on average, electric vehicle drivers will pay £250 a year under the pay-per-mile charge, compared to the average £600 fuel duty charge that owners of petrol- or diesel-powered cars pay.

Simmons said: “The transition to electric vehicles is essential for meeting the UK’s climate goals, but it also creates a significant gap in fuel duty revenues that fund our roads and infrastructure.”

“Fuel duties were originally introduced as a form of road pricing. Therefore, whilst it’s crucial that the UK government continues to incentivise the transition to electric vehicles, it must address these falling tax revenues,” she said.

“Any new tax should be simple to understand and apply and continue to support the shift to cleaner transport, whilst ensuring the costs of maintaining our roads are shared equitably. This means coupling any new charges with continued investment in electric vehicle infrastructure and incentives and addressing the broader issue of road pricing. Sustainability must remain at the heart of tax policy,” Simmons added.

On Thursday, Transport for London announced it will lift the current exemption that electric vehicles have to the congestion charge in central London from 2 January 2026. Electric cars will benefit from a discounted rate under the changes.