Electric vehicles have rapidly grown in popularity in recent years as drivers seek out greener alternatives to petrol and diesel cars. A key incentive for drivers has been the exemption of EVs from vehicle excise duty (VED), also known as road tax.
However, the government has now announced plans to remove this exemption by 2025, meaning electric cars will be brought into the tax system.
What is VED?
VED is an annual tax levied on vehicles registered in the UK. The amount of VED varies depending on the vehicle’s age, fuel type and carbon dioxide (CO2) emissions. VED rates are split into different bands, with vehicles producing the lowest emissions paying the least. Petrol and diesel cars usually pay a standard rate, which in 2022-23 is £165 for cars registered after April 2017. Alternatively fuelled vehicles (AFVs), including hybrids and EVs, currently receive a £10 discount on this rate.
VED also includes a ‘first year rate’ which is based on CO2 emissions for new cars, applied in the first year after registration. After this, cars move to the standard rate. Cars with zero emissions currently pay no VED in their first year. The government says VED helps ensure drivers make an appropriate contribution to the costs of road infrastructure and recognises the environmental costs of driving.
Why are EVs exempt from VED?
When VED bands were introduced in 2001, EVs were still a niche technology. The government therefore created an incentive by exempting zero-emission EVs from any VED charges. This helped boost early adoption of EVs when there were very few models available.
20 years on, EVs are becoming mainstream. There are over half a million fully electric cars on UK roads. Falling battery costs mean sticker prices are coming down towards parity with petrol/diesel. Research suggests that between 2025-2030, EVs will reach ‘tipping point’ and match conventional cars for upfront cost.
With EVs going mainstream, the tax exemption is now seen as some as an overly generous subsidy. Critics argue it deprives the Treasury of much-needed revenue and gives an unfair advantage to EV drivers who can afford the cars.
In his March 2022 Spring Statement, Chancellor Rishi Sunak announced the VED exemption for EVs will end from April 2025. This means that from 2025-26, new and existing electric cars will move into the standard VED taxation system.
For new EVs registered after April 2025, this means paying:
- The ‘first year rate’ VED (£10 in 2022-23) based on zero emissions
- The standard rate VED (£165 in 2022-23) in subsequent years
For existing EVs registered before April 2025, they will pay the standard rate at their next renewal after April 2025. VED is renewed annually on the anniversary of first registration.
The removal also impacts electric vans and motorcycles. Most will move to the petrol/diesel annual rate for their vehicle class. Electric vans currently pay £10 less than the petrol/diesel rate.
In summary, from April 2025 electric vehicles will no longer be exempt and will pay road tax on the same basis as petrol, diesel and hybrid cars.
Why is the tax exemption ending?
The government argues that as EVs become mainstream, it’s no longer fair for them not to contribute to road infrastructure costs in the same way as conventional vehicles. Ending the exemption will raise much needed revenue for the Treasury.
The government is also clawing in lost revenue with ULEZ and congestion zone charges, with the TfL making EV owners pay the congestion charge from 2025.
The government says it’s still committed to supporting EV uptake. Other incentives like low benefit-in-kind tax rates for company cars will continue. Grant schemes for installing charging points at homes and businesses also remain in place.
You can also save money on an EV with a salary sacrifice scheme. Electric cars and salary sacrifice works by reducing your taxable income. Since the lease cost comes out pre-tax, you avoid income tax and national insurance contributions on that amount.
When will the changes take effect?
The VED exemption will end from 1 April 2025, which aligns with the 2025-26 tax year.
For new electric cars and vans registered after this date, VED will be payable immediately based on the new first year and standard rates.
For existing EVs registered before 1 April 2025, the change will apply at their next renewal date falling after 1 April 2025. Most car VED is renewed on the anniversary of first registration.
So if you have an electric car registered on 1 May 2024, its next VED renewal is likely to be 1 May 2025. This renewal will be under the existing £0 rate as it’s before the 1 April 2025 cut-off. But the following renewal on 1 May 2026 will be liable for VED at the new standard rate.
The key date is 1 April 2025 – any renewals after this will pay road tax, irrespective of original registration date.
What about other incentives?
While the VED exemption is being removed, the government emphasises it is still committed to supporting EV take-up through other incentives. These include:
- Favourable company car tax rates – EVs pay just 2% benefit-in-kind tax in 2022-23 compared to as much as 37% for petrol/diesel models.
- Grants for installing charging points at homes and businesses, worth up to £350 for home charge points to landlords.
- Favourable capital allowances for businesses investing in zero emissions vehicles and chargepoint equipment.
- Ongoing grants for EV taxis and trucks under the Plug-in Van Grant.
- The phase-out of petrol/diesel vehicles by 2030, forcing drivers to switch to EVs or hybrids.
Critics argue the loss of the VED exemption slightly weakens the incentive to go electric. But with upfront cost parity expected by the mid-2020s, other factors like charging infrastructure, range anxiety and model choice may well become bigger barriers. The impact on EV uptake is expected to be modest and largely outweighed by other policy support.
Another cost factor to consider is future payment for congestion charges and ULEZ zones with electric cars. From 2025, you will pay for these even with an EV.