Government considering pay-per-mile tax for EV drivers

Budget 2025: Chancellor reported to be looking at charging electric car drivers 3p-a-mile

Chancellor Rachel Reeves is considering pay-per-mile tax for electric vehicles in her Budget.

It is being reported that EV drivers could face 3p-a-mile charge on top of other road taxes to offset falling revenue from petrol and diesel cars. It is estimated that a 3p-a-mile road user charge woud cost the average driver £250 a year.

Making EV drivers pay a charge a per mile on top of other road taxes is seen as a way of offsetting falling revenue from petrol and diesel cars. The decrease in petrol usage has meant that, by 2040, there will have been roughly £12bn lost in tax revenue from fuel duty according to Treasury estimates.

A government spokesperson told national media outlets: “Fuel duty covers petrol and diesel, but there’s no equivalent for electric vehicles. We want a fairer system for all drivers.”

According to the Office for Budget Responsibility (OBR), fuel duty is expected to fall to just 2% by 2025/26 having once been almost 7% in 20219/2020. In addition, there has been a fuel duty freeze for a decade, which has cost the Exchequer around £100bn in lost revenue, and, if duty had risen in line with RPI, it would provide an extra £17.4bn a year to HM Treasury’s coffers.

It has been reported that the charge will be based on an estimated average rather than on electronically monitored data.

It appears that the scheme is being referred to as ‘VED+' in order align it with the annual payment of vehicle excise duty (VED) that has been paid by EV drivers since April of this year.

To calculate how much they must pay, EV drivers will be expected to estimate the number of miles they will drive in the year and pay a fee pre-emptively.

If the actual miles driven fall short of the estimate, some of the remaining money paid can then be carried over to the next year, with drivers who overshoot their estimate having to top up their payment if needed.

The charge will also apply to hybrid cars, although this will be set at a lower rate than for EVs.

The Driver and Vehicle Licensing Agency (DVLA) oversees the collection of VED so is likely to be tasked collecting the new tax.

The government is also reported to be working on a wider package of measures to support the EV sector, offering both discounts and incentives such as exemption from low emission zone charges to encourage people to buy EVs. 

Responses

Political opponents, automotive companies, drivers’ associations and tax organisations all expressed concern over the pay-per-mile charge. Issues raised included a potential dampening effect another tax could have on the transition to EVs and concerns over the procerss for collecting the payments.

Liberal Democrat Treasury spokesperson Daisy Cooper MP said: “It beggars belief that in the midst of a cost-of-living crisis and in the face of air pollution and rising respiratory diseases, the government is looking to hit people with an electric car tax. Ministers should be making it easier to have an electric car by rolling out more charging infrastructure across the country not penalising drivers with this unfair and short-sighted measure.”

Responding to the proposal, Sir Mel Stride, the Conservative shadow chancellor, said: “If you own it, Labour will tax it. It would be wrong for Rachel Reeves to target commuters and car owners in this way just to help fill a black hole she has created in the public finances. With Labour’s cost of living crisis, now is not the time to hit hard-working families and businesses with another tax raid.”

The Society of Motor Manufacturers & Traders (SMMT) said: “We recognise the need for a new approach to motoring taxes but at such a pivotal moment in the UK’s EV transition, this would be entirely the wrong measure at the wrong time. Introducing such a complex, costly regime that targets the very vehicles manufacturers are challenged to sell would be a strategic mistake – deterring consumers and further undermining industry’s ability to meet ZEV mandate targets, with significant ramifications for perceptions of the UK as a place to invest. A smarter, fair and future-ready taxation system requires a fundamental rethink – one that must be done in full partnership with the industry and other stakeholders.”

Vicky Edmonds, chief executive of drivers’ association EVA England, said: “This is the wrong time to bring in further costs for EV drivers. Our survey data shows that at least half of drivers are still finding the upfront purchase costs of these vehicles to be too high, and that half of EV drivers without driveways are finding their vehicles more expensive to run than their former petrol and diesel cars. These challenges to switching to electric must be addressed urgently, and before any scheme that suggests additional costs is considered.”

Edmund King, AA president, said: “Government should tread carefully unless their actions slow down the transition to EVs.”

James Court, head of policy at Octopus Electric Vehicles, said: “EV drivers should pay – but it should come at the right level and the right time. Now would be far too soon – EVs represent only 4% of cars on our roads and a tax would raise a minimal amount until this number is bigger. As we’ve seen in other countries, introducing a charge now would stifle the growth we’ve seen over the past years, and be self-defeating. What is needed is a considered plan for the best and fairest way for all road users to handle the change in vehicle mix over time.”

Tom Middleditch, sustainability spokesperson at Europcar said: “Unquestionably the government has some difficult decisions to make to plug public finances, but we have a deep concern that a tax on mileage of electric vehicles will create doubt in people’s minds and be another deterrent to adoption of zero tailpipe emissions motoring right now. Our own research shows that cost is one of the main barriers to EV adoption – indeed we took our own initiative to remove this from electric rental by offering price parity for B2B customers with ICE vehicles.

“With the government’s ZEV targets unlikely to be met this year for a variety of reasons it is critical, therefore, that nothing is done at this point to discourage businesses and motorists from making the switch. Putting a tax on mileage also feels counter-intuitive to the government’s zero emissions ambitions. “

Nathan Coe, chief executive of car sales platform Autotrader, said: “At the moment, one of the big differences is that whilst EVs do cost a little bit more up front, they are much cheaper to run. This kind of takes some of that benefit away.”

George Penny, EV charging expert The Solar Co, said: “The government’s new pay-per-mile proposal, likely to be incorporated into the Autumn Budget is expected to raise more than £362m for the government, based on an estimated 1.7 million electric vehicles each travelling an average of 7,100 miles per year. Based on the new tax rate of £0.03 per mile, the average EV driver will therefore pay around £213 per year - but this figure rises sharply in regions where residents are more dependent on their cars for everyday journeys. This could come as a shock to many EV owners who have previously benefited from road tax incentives, with the Vehicle Excess Duty only being introduced in April 2025.

“Our analysis reveals that EV owners in the South East will be most impacted, seeing a tax of £260 for the average driver, followed by £230 for EV owners in the East of England and £225 for those in the North West. Londoners are amongst those least impacted, with an anticipated tax of £165, beaten only by EV owners in Wales and the North East, who would still face an EV road tax of £160 and £130 respectively under proposed legislation.

Mairéad Warren de Búrca, managing director in Alvarez & Marsal’s Indirect Tax, said: “A per-mile charge for EVs would mark a major shift in how the Treasury raises revenue from road users. The Chancellor faces a clear tension: maintaining fairness as fuel-duty receipts collapse, without discouraging the switch to electric.

“The measure makes fiscal sense, but as ever, timing will be everything. If the government wants credibility on net zero and tax reform, it must show this is about modernising revenue, not penalising greener drivers. The EV sector will be disappointed, with many hoping for a cut in VAT on public charging from 20% to 5% to match the rate for home charging. The real challenge, though, is delivery – a per-mile system would likely rely on manual or self-reported data, creating an administrative headache for the government.”