End of the Road for EVs in the UK? New Car Tax Changes Spark Concern

A ripple of apprehension is spreading across the UK's electric vehicle landscape. Recent alterations to car taxation policies have ignited worries among drivers and industry experts alike, prompting questions about the nation's future trajectory of EV adoption. Will these fiscal adjustments put the brakes on the burgeoning electric revolution?

Fresh tax regulations, implemented just last week, are set to impose significant costs on numerous motorists, notably those who own electric vehicles (EVs) and premium-priced new cars, simply to use the roads. For instance, a person buying a new 1-litre Ford Puma now faces an initial tax payment of £440, doubling the former £220 levy.

Sweeping changes to the vehicle excise duty (VED) system took hold on 1 April, bringing about several fresh levies. Electric vehicle owners, who previously didn't have to pay this tax, now find themselves subject to it. Furthermore, they face an 'expensive car supplement' for half a decade if their new purchase exceeds £40,000, a price point common for many EVs.

These revisions have sparked worries that people will be discouraged from purchasing EVs. In parallel, people buying new petrol or diesel automobiles will face charges that, in many instances, are twice as high as the previous year's rates.

Understanding VED: What UK Drivers Pay Each Year

Often referred to as car tax, VED represents a yearly payment made by individuals who drive cars, vans, motorcycles, and other vehicles for the privilege of using public roadways across the United Kingdom.

According to taxation researchers Francesco Masala and Louise Butcher, in their briefing paper, the amount a vehicle owner pays in VED is determined by several elements, such as the kind of vehicle they possess, the date it was initially registered, and its environmental impact. It's worth noting that some vehicles, like those used for farming, are not required to pay VED.

To illustrate, vehicles first registered between March 2001 and April 2017 are taxed according to their carbon dioxide emissions. Consequently, cars that produce less pollution incur a lower tax rate.

This rule applies whether you purchased a brand-new car before 2017 or acquired a secondhand vehicle. According to a report by The Guardian, the yearly tax associated with these vehicles can differ significantly, ranging from a minimal £20 to as much as £760. A separate system governs cars registered after that period.

During the first year, buyers are subject to a 'showroom tax' that fluctuates based on the vehicle's CO₂ output. Subsequently, a uniform flat rate applies. Additionally, for cars priced above £40,000, an extra £425 tax per year is required for the five years after the car's registration.

This year marks a significant shift as EVs are now part of the tax system for the first time, having previously enjoyed an exemption. Owners of new EVs will now pay the standard rate following a reduced charge in the first year. Also, those who purchased a new EV costing over £40,000 will also be subject to the 'expensive car' levy.

The Price Hike: How Much More Will Drivers Pay?

Individuals purchasing a brand-new petrol or diesel car could now face a first-year tax bill that's twice as high as what was charged in the previous year. Consider, for instance, that same new 1-litre Ford Puma, producing 122 grams of carbon dioxide per kilometre, now carries a first-year tax that's twice the previous amount. After this initial outlay, the annual tax will then be reduced to the new standard level of £195.

To illustrate the jump, someone buying a new Land Rover Defender, with 240g/km emissions, now has to shell out £4,680 in the initial year – a 100% rise from the previous year's cost. Furthermore, this vehicle will also be subject to the £425 'expensive car' tax for the subsequent five years, an increase from last year's £410.

Starting in the second year of ownership, the regular yearly tax for cars registered after 2017 will experience a slight uptick, going from £190 to £195. In a significant change, electric vehicle purchasers, previously exempt from this tax until 1 April, will now be required to pay £10 in their first year and then the standard annual rate in subsequent years.

According to guidance from the Driver and Vehicle Licensing Agency, a critical shift for cars registered from 2001 to 2017 is that even vehicles with emissions below 100g/km, which encompasses many hybrid cars, will now incur a yearly tax of £20, a departure from their former tax-free status.

Will The Tax Changes Spur EV Demand?

During her budget announcement last October, Chancellor Rachel Reeves explained that the intended effect of these tax modifications was to stimulate more sales of EVs by enlarging their financial advantage over petrol and diesel alternatives.

Despite the Chancellor's view, some analysts believe this recent policy shift complicates the transition to electric vehicles, as eliminating the tax exemption has driven up the overall cost of ownership.

John Cassidy, the managing director of sales at Close Brothers Motor Finance, points out that some potential buyers are already hesitant due to the UK's still-developing battery charging network for EVs. He argues that 'applying VED to EVs provides one less incentive for buyers to make the switch.'

Jon Lawes, the managing director of Novuna Vehicle Solutions, a Surrey-based company that provides fleets of cars to businesses, highlights that most EVs exceed the £40,000 threshold and will, therefore, be subject to the expensive car supplement.

Lawes argues that this added expense might encourage employers to consider cheaper, non-EV options for their vehicle fleets.

According to Lorna Macpherson, a motor finance specialist at Ocean Finance, which offers car financing, although the tax system changes favour lower running costs for cleaner cars, the escalating expenses associated with driving could hinder drivers' ability to transition to them.

'For petrol and diesel cars, an increase in VED means higher ­running costs for owners, ­making newer, more efficient cars even more attractive,' she says. 'But with rising interest rates on car finance and the general cost of living ­crisis, many will hold on to their ­current vehicles for longer rather than upgrading.'

Vauxhall states that all of its EV offerings now fall below the £40,000 mark, ensuring its customers won't have to pay the expensive car supplement. Macpherson suggests that other manufacturers with EVs in a similar price range might be prompted to take similar action.