Taxing an EV and what the future holds for tax-free driving

By Kyle Roache

Last updated: Nov 15th 2024

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One of the main benefits – other than helping to reduce climate change and improving air quality – of EVs is the lack of Vehicle Excise Duty, otherwise known as road tax.

The Department for Transport (DfT)’s last major change to the taxation rules came in 2017, which saw low CO2 cars added to the tax-paying numbers with plug-in hybrid drivers paying £145 per year. Cars costing more than £40,000 would also be subject to a surcharge for the first five years, but in 2020 this was revised, and electric vehicles exempt from all VED costs no matter how much they cost. You still have to tax the car online, however, even if it costs £0.

Hybrid and plug-in hybrids are deemed Alternative Fuel Cars and receive a £10 discount on the £155 cars that cost less than £40,000 are charged, so £145. If a car costs more than £40,000 when new, that means an annual fee of £480 for the first five years – £335 of which is because it’s above £40,000.

What about older hybrids and EVs?

The Vauxhall Amera (pictured above) was one of the first plug-in hybrid vehicles sold in the UK going on sale in 2011

If the car was built between March 1 2001 and March 31 2017, then whether they are electric or hybrid, they are fully tax-exempt as long as they emit less than 100g/km of CO2. The cost of tax goes up depending on how much CO2 you release.

What does the future hold?

It’s clear that the era of tax-free EV driving cannot last forever – as the take-up of electric vehicles grows, the government’s tax take from petrol and diesel will diminish. Seeing as motoring taxation contributes £35billion a year in revenue, which could fall to £0 by 2040, change is coming. This is more than just about roads. Huw Merriman, the Conservative chair of the transport select committee, said the expected £35bn black hole in finances is “4% of the entire tax take” and as only £7bn goes back into the road network. As a result “schools and hospitals could be impacted”.

Road pricing

What’s most likely to happen is a form of road pricing, which will be familiar to those who have driven across mainland Europe. In February 2022 Parliament’s Transport Committee pretty much outlined that there are few other options than to charge drivers for the miles they cover based on GPS data, congestion levels and vehicle type.

In terms of infrastructure, a lot of it is in place – the push for Smart Motorways saw the rapid introduction of more overhead gantries on the UK’s road network, which could easily be adapted to take on the new hardware. Singapore has used a similar system for more than 20 years, in which drivers are charged automatically for journeys measured when they go by a series of gantries.

Black boxes

Most modern cars have extensive tracking devices in them already, which stores and transmits data on everything from the throttle and brake behaviour, to when and where the tailgate was opened. Such data was used to convict a man of murder; it’s easy to see how such technology could be implemented into a road pricing scheme. The EU has already mandated the introduction of ‘black boxes’ and speed limiters.

London has recently announced plans to move to a road charging model, though the Mayor’s office admits that the technology isn’t quite ready yet. There are also significant civil liberties discussions to be had.

In the short to medium term

While changes will come, the technology, infrastructure and political will is a way off yet. Road pricing has tended to go down like a lead balloon among the electorate, and there are several caveats to it. In a bid to avoid premium road charging on motorways, will this lead to more drivers using ‘cheaper’ roads in residential areas, with the subsequent increase in congestions, collisions and pollution

However, while EV ownership continues to grow, much of this is via fleets. The UK government would be unwise to pull the taxation rug up too early, even if the recent PiCG caught everyone by surprise…