The way that electric vehicles (EVs) – including cars, motorbikes, and vans – are taxed is changing in more ways than one. Here’s everything you need to know.

Vehicle excise duty

Vehicle excise duty (VED) is a tax levied on every vehicle on UK public roads. It’s a significant source of revenue, estimated to raise £7.2 billion in 2022/23.

The Government began basing VED on vehicle emissions in 2001 to encourage motorists to reduce the pollutants they released into the atmosphere (with vehicles emitting more, paying more). EVs, on the other hand, were exempt from the tax.

Since then, EV car sales have boomed, increasing by 76.3% in 2021. There are currently an estimated 660,000 electric cars on the road in the UK and over 445,000 plug-in hybrids (PHEVs) as of the end of December 2022.

According to the Tony Blair Institute for Global Change, EV sales will rise to around 3 million by 2025, 10m by 2030, and 25m by 2035.

With EVs and PHEVs projected to replace many petrol and diesel vehicles in the future, this calls into question the fairness of a tax solely levied on polluting vehicles. That’s not to mention the £30bn lost in tax by 2040 if EVs continue to pay no VED.

Therefore, from 2025, the Government will require EVs to pay the same rates as petrol and diesel vehicles, circumventing both problems. “This will ensure that all motorists begin to pay a fairer tax contribution”, the Treasury wrote.

The changes mean that from 2025:

  • new zero-emission cars registered on or after 1 April 2025 will be liable to pay the lowest first-year rate of VED, and move to the standard rate from the second year of registration onwards
  • zero-emission cars first registered between 1 April 2017 and 31 March 2025 will also pay the standard rate
  • zero and low-emission cars first registered between 1 March 2022 and 30 March 2017 currently in Band A will move to the Band B rate
  • electric vans will move to the rate for petrol and diesel light goods vehicles
  • electric motorcycles will move to the rate for the smallest engine size
  • the expensive car supplement exemption for EVs will end.

Fortunately, motorists have a couple of years before the change kicks in to budget appropriately. VED rates are also relatively low: for the 2022/23 tax year, the annual flat rate for the second tax payment onwards is £165 per annum.

Advisory electric rates

Next is a change that affects people who drive an electric company vehicle and how employers reimburse them.

In 2018, the Government introduced advisory electric rates (AER) as a simple way to refund business mileage for electric car drivers – the equivalent of advisory fuel rates (AFR) for petrol and diesel cars.

AFRs and AERs are the Government’s recommended rates for reimbursing employees’ fuel costs while driving a company car for business purposes. Employers can also use both advisory rates if they need to repay the mileage costs for private travel.

AERs used to be primarily based on data from the Department for Business, Energy, and Industrial Strategy (BEIS) and were updated yearly.

They will now be reviewed and updated quarterly, just as with AFRs. They will also now be based on a broader range of data – from the BEIS, Office for National Statistics, and electrical consumption rates.

The Government also increased AERs from five to eight pence per mile in December 2022 after calls from the industry that rates had not kept up with rising energy prices.

Therefore, employers may have to pay more volatile and (in the near term) more generous benefits-in-kind to employees driving company electric vehicles.

Talk to us about your unique situation for specific advice on EV taxes.