How The Autumn Budget Changes Car Tax Rules?

Snapshot: The November 2022 autumn statement, as delivered by Chancellor of the Exchequer, Jeremy Hunt on 17th November stated that electric car owners will pay £165 per year in car tax, and hybrid car owners will no longer pay less than petrol or diesel owners.

Electric cars will no longer be exempt from car tax (Vehicle Excise Duty – VED) from April 2025 with all existing electric vehicle (EV) owners affected. In a similarly surprising move, the government announced rates for alternative fuel vehicles (such as hybrids vehicles) will be brought in line with standard rates of car tax as apply to petrol and diesel vehicles.

From 1st April 2025, owners of new electric cars will pay the lowest rate of tax, set at £10 in the first year of ownership, but this will rise to £165 per year after that. Electric car owners will also no longer be exempt from the ‘luxury car tax’ (or the ‘expensive car supplement’), which currently means owners of cars costing more than £40,000 pay an additional tax of £355 per year, for five years.

Note: This £355 is added to the standard rate, which means based on today’s rates electric car owners will pay £520 per year, for five years. Further, based on a recent Which? magazine study, out of 50 electric cars that can be bought brand new today, half start at over £40,000.

What are the new tax rates for electric cars?

With electric cars, the amount of tax you pay will be depend on the age of the vehicle. As is the case today, there will be a first year rate of tax, a standard rate of tax, and an additional rate of tax for cars that cost more than £40,000.

The first year rate applies to the car’s first year of ownership and is part of the car’s OTR (on-the-road) price, based on official CO2 output.

The standard rate takes effect from the second year onwards and is a standard rate regardless of CO2 output.

The expensive car supplement (or luxury car tax) applies to new cars that cost over £40,000. This is an additional rate of tax to the standard rate, paid in years 2, 3, 4, 5 and 6 of ownership. The current rate is set at £355.

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What is the tax rate for electric cars first registered on or after 1st April 2025?

In year 1, electric cars first registered on or after 1st April 2025 will pay the lowest rate of tax, which is currently £10. From year 2 onwards they will pay the standard rate of £165 per year, which is the same as petrol and diesel car owners. Additionally, if the electric car is brand new and costs more than £40,000, there is an expensive car supplement of £355 which applies for five years.

As it adds to the standard rate, you will pay a supplementary rate during years 2-6 of ownership. Based on on today’s rates, that would mean electric car owners would pay an extra £355 on top of the standard rate of £165, to spend a total of £520 per year, for years 2-6 of ownership, before dropping back down to the standard rate of £165 from year 7 of ownership and on.

What is the tax rate for electric cars first registered between 1st April 2017 and 31st March 2025

Electric cars first registered after 1st April 2017 will pay £165 per year from April 2025. The £40,000 luxury car tax is not being backdated, which means an electric car that was first registered between 2017 and 2024 should not have to pay the supplement of £355 on top of the standard rate of tax from April 2025.

What is the tax rate for electric cars first registered between 1st March 2001 and 31st March 2017?

Generally speaking, electric cars came to market around 2009-2010, but electric cars that were registered before 31st Match 2017 will be eligible to pay the ‘band B rate’ of tax, currently this is £20 per year. Rates for all cars first registered between 1st March 2001 and 31st March 2017 are based on CO2 emissions.

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What is the tax rate for hybrid cars?

Hybrid cars are classed as ‘alternative-fuelled’ vehicles, which all currently pay slightly less car tax than a standard petrol and diesel car.

For hybrid cars registered after 1st April 2017, the tax is £10 less per year in both the first year and from the second year of ownership. The current standard rate is £155 (compared to £165 for petrol and diesel cars). As stated in the budget, this will be brought in line from 2025, meaning hybrids, petrol and diesel cars will all pay the same rate of tax.

What are the benefit-in-kind increases?

A benefit-in-kind is any non-cash benefit of monetary value that is provided to employees, also knows as notional pay, fringe benefits or perks. The Autumn Statement set out tax levels for BiK on new cars through to 2028. From 2025, benefit-in-kind will go up for almost all vehicles. The only exception being cars with the highest emissions, which are already taxed at the highest threshold.

Currently the benefit-in-kind for an electric vehicle is 2%. This will stay the same until April 2025. From that date it will increase by 1% a year for 3 years, i.e. 3% in 25/26, 4% in 26/27, and 5% in 27/28.

For hybrid vehicles emitting less than 75g/km of CO₂, there will be a 1% benefit-in-kind increase each year from 2025 to 2028. All other vehicles which pay a lot more benefit-in-kind, will also have a 1% increase from 2025.

In summary

These changes to electric car taxation were always going to come into play at some point in the not so distant future, and this is a continuation of the process to incentivise electric vehicle owners so that we continue to reduce the need and impact of petrol and diesel vehicles on the road, but with an eye on generating tax from electric vehicles as they become more popular. It is not the death of electric vehicle as some in the industry are calling it, in fact these new taxation laws are actually a further incentive for people to consider an electric vehicle as it balances the need to increase total tax revenue without completely killing the tax benefits of owning an electric car.

Key point: These new tax increases will only come into effect from April 2025, which is also after the next general election. Which means the next government could totally change everything that has been stated above.

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