Electric Car Buyers Face Higher Taxes from April, Potentially Thousands
Drivers who opt for an electric car over a petrol or diesel model are set to face a financial sting from April, with new tax rules making them three times more likely to be hit by the luxury car tax. This shift in taxation policy, introduced by the Labour government, is set to impact the nation’s move towards greener motoring, according to online vehicle marketplace Auto Trader.
From 1 April 2025, electric vehicle owners will, for the first time, be required to pay Vehicle Excise Duty (VED), often called car tax. This means all EV owners will be charged at least the standard rate, which will be £195 annually from the second year after the vehicle is registered.
However, a significant additional charge awaits those buying new EVs with a list price exceeding £40,000 from 1 April: the expensive car supplement, known as the luxury car tax. This supplement adds £425 annually from years two to six after a car is registered, bringing the total annual VED bill to a considerable £620, or £3,100 over a five-year ownership period.
This additional tax has been dubbed the ‘Tesla tax’ by many EV owners and industry insiders, primarily because new cars sold by the popular US manufacturer often surpass the taxable £40,000 threshold.
VED Changes: A Closer Look
The changes to VED were originally announced in November 2022 under the Conservative government by then-chancellor Jeremy Hunt.
Despite reservations from industry experts, the Labour Government is continuing with this policy. The price of electric vehicles is often higher than that of conventionally fueled cars due to the costs associated with battery manufacturing.
Auto Trader has reported that 56% of electric cars up to five years old listed on their site have a list price exceeding £40,000, while only 16% of petrol or diesel cars in the same age range meet this criterion.
Ian Plummer, commercial director of Auto Trader, said it is wrong to “give consumers additional reasons not to make the switch” to electric motoring.
EVs up to five years old on our site are three-and-a-half times more likely to be hit by the expensive car supplement than internal combustion engine cars in the same age range. That kind of difference is unhelpful for efforts to persuade drivers to switch.
Rachel Reeves, speaking during her Autumn Budget statement, indicated that comprehensive changes to VED, including doubling the first-year tax rates for all new petrol and diesel cars, are projected to generate £400 million annually.
Understanding the New Tax Rates
Here’s a breakdown of how the new VED rates will affect electric car owners:
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New EVs registered on or after 1 April 2025:
- Buyers will pay £10 for the first year.
- From the second year, these EVs will be subject to the standard VED rate, which is increasing to £195 annually from April 1, 2025.
- If the EV has a recommended retail price (RRP) of £40,000 or more, buyers will also be subject to the ‘expensive car supplement’ of £425 from years two to six. This means owners of such vehicles will pay at least £620 per year in VED from the second year through the sixth.
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EVs registered between 1 April 2017 and 31 March 2025:
- Owners of EVs registered during this period will be forced to pay the standard VED rate of £195 from 1 April.
- Expensive car supplement does not apply to EVs registered before 1 April 2025.
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EVs registered between 1 March 2001 and 31 March 2017:
- Even early adopters of electric cars won’t avoid the tax.
- These vehicles will be subject to the lowest VED band, costing £20.
The government has set a zero-emission vehicle (ZEV) mandate, requiring that at least 28 percent of all new cars sold by manufacturers this year in the UK must be zero-emission. Pure electric vehicles generally fulfill this requirement. Failure to adhere to the mandate or the utilization of flexibilities, such as buying credits from competing companies, will result in a fine of £15,000 per polluting car sold beyond the set limits.
Steve Gooding, director of the RAC Foundation, suggested that the Treasury’s rationale for the expensive car supplement is that buyers of cars costing over £40,000 “can reasonably be asked to dig a bit deeper to pay more tax.” However, he doubts this logic applies to those buying used cars, which typically depreciate quickly in the initial years.
Quentin Willson, founder of FairCharge and advisory board member of EVUK, strongly disagrees with the EV expensive car supplement. He argues that “£620 a year to tax most EVs will discourage private buyers who get no incentive whatsoever to switch from combustion to electric” and that the Treasury is creating tax barriers.
A Treasury spokesperson responded that “The shift to electric vehicles will support growth and productivity across the UK and is crucial for tackling climate change.” They added that the approach ensures fiscal stability during the shift to electric vehicles, including introducing vehicle excise duty on EVs from April 2025 while preserving incentives to encourage their use.
