New Taxes to Hit Drivers of Higher Priced Vehicles
New tax adjustments are set to impact millions of drivers, as the UK government, under the guidance of Chancellor Rachel Reeves, prepares to implement changes to the existing ‘Expensive Car Supplement.’ The upcoming Spring Statement has triggered a wave of concern throughout the UK car sector.
Industry leaders are urging the government to raise the threshold for the luxury car tax, currently set at £40,000, to better reflect the realities of the electric vehicle (EV) market. Experts warn that the current threshold could negatively impact a large portion of the car sector.
The Expensive Car Supplement, often called the “luxury tax,” was implemented in 2017 for internal combustion engine vehicles costing over £40,000. This surcharge is scheduled to apply to electric vehicles beginning April 2025.
The government has previously acknowledged the “disproportionate impact” of the threshold on drivers aiming to purchase zero-emission vehicles, suggesting a willingness to address the issue.
Tax Implications and Industry Concerns
The £40,000 threshold takes into account optional extras and is based on the manufacturer’s list price rather than the actual price paid by consumers. Currently, the surcharge amounts to £410 annually for five years from the vehicle’s first registration but is set to rise to £425 beginning in April, which will significantly impact vehicle fleet operations.
Additionally, first-year Vehicle Excise Duty (VED) rates for battery electric vehicles will increase from £0 to £10, while plug-in hybrids emitting between 1 and 50g/km of CO2 will see rates rise from £0 to £110. Second-year rates for battery electric vehicles will dramatically jump from £0 to £195 and will be applied retroactively.
Analysis from vehicle leasing company Alphabet reveals the scale of the issue. Only 19% of electric cars are currently priced below the £40,000 threshold. The average P11D value across all vehicle types is £51,855, 25% over the threshold, according to the company. For electric vehicles specifically, the average list price reaches £60,273, according to Fleet News reports.
In response, Alphabet is calling on the government to raise the threshold for electric vehicles to £60,000 to protect drivers. The Association of Fleet Professionals notes that some fleets could see their EV liability rise from zero to £2,490 per vehicle over a five-year period because of the new tax regime.
The government acknowledges the potential issues in the EV market and has indicated they may consider adjusting the threshold at a future fiscal event.
Harvey Perkins, tax expert and co-founder of HRUX, suggested that the Chancellor might address the issue in the upcoming Spring Statement during a tax webinar organised by the AFP. “There’s a chance that there will be a change regarding the expensive supplement,” Perkins said.
However, the Treasury has been downplaying expectations. They are stressing that the Spring Statement is “definitely not a Budget” with few new policies anticipated.
Industry experts have warned that the tax could negatively impact EV adoption rates in both new and used car markets.
Paul Holland, managing director for UK/ANZ Fleet at Corpay, added, “At a time when businesses need cost-effective options to transition to electric vehicles, further price hikes could delay adoption.”
