In April 2025, a new tax policy will impact the majority of car types, particularly electric vehicles (EVs). According to figures from online vehicle marketplace Auto Trader, drivers opting for an electric car over a petrol or diesel model will be three times more likely to be affected by the luxury car tax under the upcoming rules. This change has sparked debate and concern among industry experts and consumers alike.
Overhaul of Vehicle Excise Duty
The Treasury is set to remove the exemption from Vehicle Excise Duty (VED) for electric vehicles starting April 1. This means that all EV owners will be required to pay at least the standard rate, which will be £195 for the second year onward after the vehicle is registered. Additionally, drivers purchasing a vehicle registered from April 1 with a list price exceeding £40,000 will incur the expensive car supplement, known as the luxury car tax. This tax will amount to £425 annually for years two to six after registration, adding up to a total of £620 per year for many EV owners.
These changes were initially announced in November 2022 under the Conservative government and have been continued by the Labour Government. The aim behind these adjustments, as stated by then-chancellor Jeremy Hunt, was to “make our motoring tax system fairer.” However, the implications of these changes have raised concerns within the automotive industry and among consumers.
Ian Plummer, commercial director of Auto Trader, emphasized the potential negative impact of these tax changes on consumer behavior. He argued that discouraging drivers from switching to electric vehicles through increased taxation could hinder efforts to promote sustainable motoring. Plummer urged for a delay in implementing these duty increases to prevent deterring consumers from embracing EVs amid a shifting global climate.
Implications for the EV Market
The cost of manufacturing batteries for electric vehicles often leads to higher price tags compared to conventionally-fueled cars. Auto Trader reported that 56% of electric cars up to five years old listed on its site have a price exceeding £40,000, while only 16% of petrol or diesel cars in the same age range fall into this category. This disparity in taxation between EVs and internal combustion engine vehicles could potentially steer consumers away from adopting electric motoring.
Steve Gooding, director of the RAC Foundation, shed light on the rationale behind the expensive car supplement changes, suggesting that individuals spending over £40,000 on a car could be expected to contribute more in taxes. However, he raised concerns about the impact of this tax on used EV buyers, as their vehicles typically depreciate rapidly in the initial years. The unintended consequences of the luxury car tax may pose challenges in promoting the attractiveness of used EVs for decarbonizing the motoring sector.
Quentin Willson, founder of FairCharge and advisory board member of EVUK, expressed strong opposition to the EV expensive car supplement. He criticized the tax barrier that could discourage private buyers from transitioning to electric vehicles without receiving incentives. Willson highlighted the inconsistency between government efforts to promote EV adoption and the taxation policies that create obstacles for consumers.
In response to these concerns, a Treasury spokesperson defended the government’s approach, stating that the shift to electric vehicles is essential for growth, productivity, and climate change mitigation. The Treasury aims to strike a balance by introducing vehicle excise duty on EVs from April 2025 while maintaining targeted incentives to encourage their uptake. Despite the government’s rationale, the debate surrounding the impact of these tax changes on the EV market continues to unfold.
