Important tax changes for electric and hybrid vehicles
The Treasury is slashing vehicle excise duty incentives for electric and hybrid cars and vans from April 2025, and it won’t only affect new registrations. Here’s what you need to know.
Although it’s a relatively small part of total operating costs, the UK’s vehicle excise duty (VED, or “road tax”) system has been an important catalyst for change since the system was first linked to CO2 emissions in 2001.
Incentivising the most efficient models supported demand for diesel, then hybrid and most recently electric cars, while average CO2 emissions for new registrations were 43% lower in 2023 (101g/km) than they were in 2001 (178g/km) [1, AN] as manufacturers have delivered products to suit that system. It’s been so successful that the Office for Budget Responsibility is reporting declining tax revenue as a share of GDP [3].
Reforms announced during the 2022 Autumn Budget are designed to plug that gap, equalising VED rates across all engine types to create a “fairer” tax system [4]. However, those changes have faced criticism for creating a sizeable new tax bill for electric cars during a period when the zero-emission vehicle (ZEV) market is still growing. Read on to find out how it could affect your fleet.
How does the VED system work today?
The current VED system was announced under the Coalition government in 2015, replacing a sliding scale of CO2-based bands which then-Chancellor George Osborne said was “unsustainable and unfair” as three quarters of new cars would pay no tax by 2017 [5].
Since 1 April 2017, new cars have been taxed as follows [6]:
- A first year rate, paid at registration. There are 13 CO2-weighted bands, ranging from £0 for ZEVs to £2,745 for vehicles emitting more than 255g/km.
- A standard rate, paid annually. This is a flat rate of £190, regardless of CO2 emissions, or £0 for ZEVs.
- An expensive car supplement, which applies to vehicles with a list price of £40,000 or more. Currently £410, it’s added to the standard rate for the first five renewals.
Although the changes removed most CO2-based incentives, it does still offer some tax breaks for electric and hybrid vehicles.
- Alternative fuel cars (including hybrids and plug-in hybrids) qualify for a £10 discount on the first year and standard rates – which means PHEVs emitting 50g/km or less have no VED charge at registration.
- ZEVs (including electric and hydrogen fuel cell cars) are VED-exempt, and since 2020 that has included the expensive car supplement [7].
The following table compares VED costs for equivalent electric and plug-in hybrid cars with equivalent diesel, petrol or hybrid versions over the course of a three-year lease, based on the current system. These are illustrative figures, as rates rise annually in line with RPI (retail price index) inflation, which isn’t included in the calculations below:
| Car | Fuel | List Price | CO2 | First Year Rate | First Renewal | Second Renewal | VED cost |
| BMW X1 xDrive23d M Sport Auto | Diesel | £44,980 | 127g/km | £220 | £600 | £600 | £1,420 |
| BMW X1 xDrive25e M Sport Auto | PHEV | £47,420 | 17g/km | £0 | £590 | £590 | £1,180 |
| BMW iX1 eDrive20 M Sport | BEV | £46,205 | 0g/km | £0 | £0 | £0 | £0 |
| Kia Niro 3 1.6 GDI HEV | Hybrid | £32,335 | 105g/km | £185 | £180 | £180 | £545 |
| Kia Niro 3 1.6 GDI PHEV | PHEV | £37,575 | 21g/km | £0 | £180 | £180 | £360 |
| Kia Niro EV 3 | BEV | £39,575 | 0g/km | £0 | £0 | £0 | £0 |
| Vauxhall Astra Sports Tourer Ultimate 1.2 130PS | Petrol | £33,305 | 131g/km | £270 | £190 | £190 | £650 |
| Vauxhall Astra Sports Tourer Ultimate Plug-in Hybrid | PHEV | £42,495 | 30g/km | £0 | £590 | £590 | £1,180 |
| Vauxhall Astra Sports Tourer Ultimate Electric | BEV | £40,640 | 0g/km | £0 | £0 | £0 | £0 |
How much will electric and hybrid vehicles cost to tax in April 2025?
The Treasury is equalising VED rates across all different powertrains, removing discounts on hybrids, exemptions for electric vehicles and backdating the changes to include low-CO2 cars which are already on the road.
This means:
- All cars registered since 1 April 2017 will pay the same standard rate, including electric vehicles.
- All new cars registered from 1 April 2025 will also qualify for the expensive car supplement, if they have a list price of £40,000 or more.
The expensive car supplement affects many of the UK’s most popular electric vehicles. Only one of 2023’s best-selling electric cars [8], the MG4, has an entire model range priced under £40,000, while five have a list price higher than that threshold in entry-level trim. From next year, this could result in three-times higher VED renewals for an electric car compared to a petrol, diesel or hybrid version of the same model.
Re-visiting the examples above, the following table shows how those changes impact tax costs over a three-year lease contract for vehicles registered after 1 April 2025. These calculations do not include annual RPI-related adjustments.
| Car | Fuel | List Price | CO2 | First Year Rate | First Renewal | Second Renewal | VED Cost (increase) |
| BMW X1 xDrive23d M Sport Auto | Diesel | £44,980 | 127g/km | £220 | £600 | £600 | £1,420 (+£0) |
| BMW X1 xDrive25e M Sport Auto | PHEV | £47,420 | 17g/km | £10 | £600 | £600 | £1,210 (+£30) |
| BMW iX1 eDrive20 M Sport | BEV | £46,205 | 0g/km | £10 | £600 | £600 | £1,210 (+£1,210) |
| Kia Niro 3 1.6 GDI HEV | Hybrid | £32,335 | 105g/km | £195 | £190 | £190 | £575 (+£30) |
| Kia Niro EV 3 | BEV | £39,575 | 0g/km | £10 | £190 | £190 | £390 (+£390) |
| Vauxhall Astra Sports Tourer Ultimate 1.2 130PS | Petrol | £33,305 | 131g/km | £270 | £190 | £190 | £650 (+£0) |
| Vauxhall Astra Sports Tourer Ultimate Plug-in Hybrid | PHEV | £42,495 | 30g/km | £10 | £600 | £600 | £1,210 (+£30) |
| Vauxhall Astra Sports Tourer Ultimate Electric | BEV | £40,640 | 0g/km | £10 | £600 | £600 | £1,210 (+£1,210) |
The changes also remove tax exemptions from older vehicles. Cars with CO2 emissions of 100g/km or less, and registered between 1 March 2001 and 1 April 2017, will move into VED Band B – which is currently £20 per year [9]. The Treasury says this will raise an additional £3.3bn in tax revenue by the end of the 2027/28 financial year [10].
Are electric vans affected by next year's tax changes too?
Yes. Vans and pickup trucks with a gross weight of up to 3.5 tonnes have a much simpler VED system, and for most vehicles this hasn’t changed since 2001. Petrol, diesel and hybrid vehicles have a flat rate of £335 per year, regardless of CO2 emissions, while electric models are exempt.
However, the exemption for electric vans and pickups will also be removed on 1 April 2025.
Find out more
You can find out more about company car taxation in our 2024/25 online taxation guide here Ayvens Car Tax Guide 2024/25
REFERENCES:
[1] Department for Transport. (n.d.). VEH0156: Provisional average reported carbon dioxide (CO2) emission figures of vehicles registered for the first time by body type, fuel type and measure: Great Britain and United Kingdom. [online] Available at: https://assets.publishing.service.gov.uk/media/66f15b9c76558d051527abd8/veh0156.ods [Accessed 27 Sept. 2024].
[AN] Society of Motor Manufacturers and Traders (SMMT). (2001). A comprehensive CO2 database launched by SMMT in 2001 shows that new car CO2 emissions are continuing to fall. [online] Available at: https://www.smmt.co.uk/2001/12/a-comprehensive-co2-database-launched-by-smmt-in-2001-shows-that-new-car-co2-emissions-are-continuing-to-fall/ [Accessed 27 Sept. 2024].
[3] Office for Budget Responsibility. (n.d.). Vehicle Excise Duty. [online] Available at: https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/vehicle-excise-duty/ [Accessed 27 Sept. 2024].
[4] HM Treasury. (2022). The Autumn Statement 2022 Speech. [online] Available at: https://www.gov.uk/government/speeches/the-autumn-statement-2022-speech [Accessed 27 Sept. 2024].
[5] HM Treasury. (2015). Chancellor George Osborne’s Summer Budget 2015 Speech. [online] Available at: https://www.gov.uk/government/speeches/chancellor-george-osbornes-summer-budget-2015-speech [Accessed 27 Sept. 2024].
[6] Department for Transport. (2023). V149: Rates of Vehicle Tax for Cars, Motorcycles, Light Goods Vehicles and Private Light Goods Vehicles. [online] Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1146222/v149-rates-of-vehicle-tax-for-cars-motorcycles-light-goods-vehicles-and-private-light-goods-vehicles.pdf [Accessed 27 Sept. 2024].
[7] HM Treasury. (2020). Budget 2020. [online] Available at: https://www.gov.uk/government/publications/budget-2020-documents/budget-2020 [Accessed 27 Sept. 2024].
[8] Society of Motor Manufacturers and Traders (SMMT). (2023). December 2023 New Car Registrations. [online] Available at: https://media.smmt.co.uk/december-2023-new-car-registrations/ [Accessed 27 Sept. 2024].
[9] HM Treasury. (2022). Autumn Statement 2022 Documents. [online] Available at: https://www.gov.uk/government/publications/autumn-statement-2022-documents/autumn-statement-2022-html [Accessed 27 Sept. 2024].
[10] HM Treasury. (2022). Autumn Statement 2022: Policy Costings. [online] Available at: https://www.gov.uk/government/publications/autumn-statement-2022-documents/autumn-statement-2022-html [Accessed 27 Sept. 2024]