Introduction of Vehicle Excise Duty for zero emission cars, vans and motorcycles from 2025

Who is likely to be affected

Current and future owners of electric cars, vans and motorcycles. This measure will affect both private owners and organizations who own electric vehicles (EVs).

General description of the measure

This measure will equalize the Vehicle Excise Duty (VED) treatment of all zero emission and internal combustion engine (ICE) vehicles from April 2025. This change will apply to both new and existing alternatively fueled vehicles (AFVs).

Zero emission cars first registered on or after 1 April 2017 will be liable to pay the lowest first year rate of VED which currently applies to vehicles with CO2 emissions 1 to 50g/km. From the second year of registration onwards, zero emission cars will move to the standard annual rate.

The Expensive Car Supplement exemption for EVs is due to end in 2025. New zero emission cars registered on or after 1 April 2025 will be liable to pay the expensive car supplement where eligible (currently those with a list price of or exceeding £40,000 are liable).

This measure effectively removes Band A under the graduated VED system (for cars registered on or after 01/03/01 and before 01/04/17 with CO2 emissions). As the Band A rate is currently £0, these vehicles will be required to move to the first band where a rate becomes payable – in this case Band B.

Most zero emission vans will move to the standard annual rate for petrol and diesel light goods vehicles.

Zero emission motorcycles and tricycles will move to the annual rate for the smallest engine size.

Rates for others AFVs (alternatively fueled vehicles) and hybrids will also be equalized by removing the £10 annual discount.

Policy objective

To ensure all drivers begin to pay a fairer tax contribution, this measure will bring electric vehicles, which do not currently pay VEDand AFVs and hybrids, which pay a discounted rate, into the motoring tax system, in the same way as petrol and diesel vehicles.

The government will continue to use the tax system to support the transition to electric vehicles, including using a favorable first year VED rates for the lowest-emission cars; favorable Company Car Tax rates for low-emission vehicles, and through generous first year capital allowances for zero-emission cars and vans as well as for EV chargepoint equipment. The government will also continue to support the transition to EVs more broadly, including through the continuation of the plug in van grant and banning the sale of new petrol and diesel cars and vans from 2030.

Background to the measure

This measure was announced at the Autumn Statement 2022.

Detailed proposal

Operational data

The changes are expected to come into force from 1 April 2025.

Current law

Paragraph 20G of Schedule 2 to the Vehicle Excise & Registration Act (VERA) 1994 exempts electric vehicles from the requirement to pay Vehicle Excise Duty.

Proposed revisions

Schedule 2 of FAITH 1994 will be amended so that the electrically propelled vehicle exemption no longer applies to cars, vans and motorcycles. The exemption for cars with low CO2 emissions will also be omitted. Schedule 1 will be amended so that electric cars, vans and motorcycles are liable to pay the same rates as petrol and diesel vehicles. Schedule 1 will also be amended so that new electric cars will be eligible to pay the higher rate of duty, commonly known as the expensive car supplement.

The Graduated Vehicle Excise Duty (Prescribed Types of Fuel) Regulations 2001 will also be revoked so that hybrid and alternative fuel vehicles are no longer eligible for the reduced rate.

Summary of impacts

Exchequer impact (£m)

2022 to 20232023 to 20242024 to 20252025 to 20262026 to 20272027 to 2028
000+515+985+1595

These figures are set out in table 5.1 of Autumn Statement 2022 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2022.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure will affect individuals who own an electric car, van or motorcycle. These individuals will now need to pay VED on their vehicles. Changes will come into effect from 1 April 2025. For existing vehicles, changes to VED rates will apply from the vehicle’s annual renewal date for the 2025-26 financial year.

This measure is expected overall to have no impact on business’ and individual’s experience of dealing with HMRC as the introduction of VED on these vehicles does not change any processes.

This measure is not expected to impact on family formation, stability or breakdown.

Impact on business including civil society organizations

This measure will not alter the administrative process to license a car and pay tax for use on public roads. It is expected to result in negligible one-off costs as businesses and civil society organizations familiarize themselves with the band and rate changes and update administrative systems.

This measure is expected to have a negligible impact on businesses in the automotive sector, as leverage VED he EVs is not expected to significantly impact purchasing decisions. The government remains committed to its net zero objectives and will continue to offer a range of incentives to encourage the uptake of EVs.

There is expected to be no impact on civil society organizations.

Equality impacts

It is not anticipated that there will be impacts on those in groups sharing protected characteristics.

These changes will have an impact on people who own electric vehicles.

VED exemptions and discounts for recipients of disability benefits such as Personal Independence Payment (PIP) and the Scottish Adult Disability Payment will remain; this means that those groups would be unaffected by these changes.

Operational impact (£m) (DVLA)

There will be some operational impact on the Driver and Vehicle Licensing Agency (DVLA) as they will need to make system changes to the existing one VED system.

Other impacts

Removing the VED exemption from April 2025 will marginally reduce the incentive to switch to electric vehicles, but the impact should be minimal given the marginal cost of VED compared to the overall cost of a vehicle.

The government has also announced the continuation of incentives for electric vehicles through the company car tax, which will likely continue to be effective in incentivizing EV take up, and investment in chargepoint infrastructure.

Monitoring and evaluation

The measure will be kept under review by DVLAHMRC and HM Treasury through communication with key stakeholders.

Further advice

If you have any questions about this change, please contact the Energy and Transport Taxes Team at the following email address: ETA[email protected]

Declaration

James Cartlidge MP, Exchequer Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.

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