Pay per mile tax could slow down transition to electric vehicles

BUDGET 2025: The RAC's Simon Williams looks at what the Budget means for motorists

A mileage-based charge for electric and plug-in hybrid car drivers from 2028 and a short-term freeze in fuel duty are among the key changes announced in the Autumn Budget 2025. 

The RAC has broken down the most important announcements from chancellor Rachel Reeves from the perspective of car owners and motorists. 

Mileage-based electric car tax

Electric car drivers will be subject to a mileage-based charge (dubbed eVED) on battery electric and plug-in hybrid cars from April 2028.
It has been officially confirmed that the mileage-based charge will equal 3p per mile for battery electric cars and 1.5p per mile between the 2028 and 2029 financial year. Electric vans, trucks and motorcycles will initially be exempt from the charge. 

The Office for Budget Responsbility (OBR) estimates that an electric car driver travelling 8,500 miles during this period will pay an additional £255 from the mileage-based charge – said to be roughly the equivalent of half the rate of fuel duty tax paid by petrol and diesel drivers. 

Drivers will be expected to self-report their mileage by estimating the distance they will travel each year and either paying up front of paying monthly via Direct Debit. This mileage will be checked annually, either via existing MOT tests, or for new cars through an annual check procedure which could be carried out at MOT stations. 

The mileage-based charge is forecast to raise £1.1bn in tax income for the Treasury in the first year, rising to £1.9bn in 2030. 

The OBR reckons that this move will reduce demand for EVs, estimating that around 440,000 fewer electric vehicles could be sold in the five-year forecast period as a result of the changes. However, measures to incentivize EVs (such as increasing the Expensive Car Supplement threshold) will offset this figure by 320,000, according to the OBR.  

In April this year, electric car owners were forced to pay electric car road tax for the first time, with zero-emission vehicles previously exempt from Vehicle Excise Duty (VED).

Simon Williams, RAC head of policy, says: “The government will be aware that taxing all plug-in vehicles per mile from 2028 could slow down the transition to electric vehicles. This is no doubt why it has expanded the Electric Car Grant.

“With fuel duty revenue set to decline as more EVs come on to the road, this is one lever the Chancellor clearly feels she can pull to keep the money coming in. The implementation will be critical, so the devil is very much in the details.

“We note the government hasn’t cut VAT on public charging from 20% to 5% to match the rate levied on domestic electricity. This means drivers who can’t charge at home will continue to pay more." 

Fuel duty freeze

The chancellor has confirmed that fuel duty will remain frozen, but only until September 2026. After this point, the five pence cut first brought in back in 2022 will be reversed in a “staggered approach”. From April 2027, fuel duty will be increased in line with the Retail Prices Index (RPI). 

Fuel duty has been frozen for 16 consecutive years, which the OBR estimates will have cost the government £120bn in lost income. 

Simon Williams says: “Drivers will be relieved the chancellor has decided to keep the 5p duty cut in place for now as it saves them more than £3 a tank. But this relief will be very short-lived given the staggered increase from next September. 

“Without the discount, drivers would still be paying more for a litre of petrol than they were prior to Russia’s invasion of Ukraine in February 2022 which sent pump prices rocketing to record levels. 

“The introduction of the long-awaited Fuel Finder in early 2026 will also be a big moment – for the first time, all petrol stations will need to report their prices allowing customers to find the cheapest fuel wherever they are.” 

‘Luxury Car Tax’ threshold increase for EVs

In an effort to mitigate the new mileage-based charge for EVs, the chancellor is increasing incentives to purchase electric vehicles.

The headline in this is a change to the Expensive Car Supplement (ECS), also known as the ‘Luxury Car Tax’, exclusively for electric cars.
From April 2026, the list price threshold at which electric cars are subject to the tax increases from £40,000 to £50,000, meaning a lot more buyers of new EVs can avoid the charge. 

The Expensive Car Supplement currently applies to all cars with a list price in excess of £40,000. Applying from the second year the car is first registered, it adds an extra £425 per year on top of the standard rate for five years. 

The lower £40,000 barrier will continue to apply to all petrol, diesel and hybrid models, however. 

The UK's Electric Car Grant, which gives discounts of up to £3,750 off the list price of eligible EVs, has received £300m in additional funding to allow it to continue until 2030. 

EV charging cost to be reviewed

The government also intends to review electric car charging prices at public chargers, which substantially increased in the last few years.

A review will start in the first quarter of 2026 and be released in the third quarter. It will look at the impact of energy price increases as well as other contributors to the cost of public charging (such as the 20% VAT charge and the cost of National Grid connections) and consider options to lower the cost. 

Alongside this, additional funding to the tune of £200m will be provided to increase provision for EV charging and enable the UK to hit its target of 300,000 chargepoints by 2030. This includes support for both home and workplace charger installation.

Furthermore, businesses with EV chargers installed will have 100% business rate relief for 10 years. This includes public charging networks, who would have had to pass the cost of these business rates on to consumers.