Government also confirms end of 5p fuel duty freeze, a change to luxury car tax and review of EV charging prices
The UK government’s new pay-per-mile tax on electric cars will also include plug-in hybrid cars, chancellor Rachel Reeves announced in the long-awaited Autumn Budget on Wednesday.
The news was originally revealed within documents released in error by the Office for Budget Responsibility (OBR) ahead of Westminster’s announcement.
Those documents also confirmed plans by the government to end the 5p freeze on fuel duty, which will therefore increase for the first time since 2010, make changes to the ‘luxury car tax’, provide extra cash for the Electric Car Grant (ECG) and much more.
Pay-per-mile tax to hit EV and PHEV drivers
The new pay-per-mile tax – or ‘eVED’ – is being brough in as part of an effort to claw back lost revenue from the duty imposed on petrol and diesel as motorists transition away from ICE vehicles.
The levy is set at 3p per mile driven in an EV and 1.5p per mile driven in a PHEV. This will come into effect from April 2028.
The OBR forecasts that His Majesty’s Treasury will thereby raise £1.1 billion in the 2028-29 tax year, increasing to £1.9bn by 2030-31.
However, “the new charge is likely to reduce demand for electric cars, as it increases their lifetime cost”, said the OBR.
It also forecasts that the new tax will preclude some 440,000 EV sales between now and March 2031.
This will be ameliorated, however, by 130,000 of increased sales as a result of the ECG, which the government announced this July.
The OBR warned that the decrease in EV demand resulting from eVED will make it harder for car makers to satisfy the government’s ZEV mandate. This requires an EV sales mix of 28% this year, rising to 80% by 2030.
As such, it notes that “to meet the mandate, manufacturers would therefore need to respond through lowering prices or reducing sales of non-EV vehicles”.
Speaking in the House of Commons, Reeves said: “Because all cars contribute to the wear and tear on our roads, I will ensure that drivers are taxed according to how much they drive, not just by the type of car they use.”
She claimed this would “double” the road maintenance fund in England “over the course of this parliament”.
How the tax will be calculated is still to be revealed. Reports suggest that EV drivers will be required to estimate and declare their annual mileage when they pay VED.
Within the Budget documents is a statement that “further detail on how eVED will work” will be revealed when it publishes the scheme’s consultation.
It did confirm, however, that there “will be no requirement to report where and when miles are driven” or install trackers in cars.
5p fuel duty freeze ended… and then to end
Fuel duty will increase for the first time since 2010, as the government has announced that it will end the 5p freeze next year.
The current rate of 52.95p per litre was set in 2022 by then chancellor Rishi Sunak in an effort to lower high fuel prices exacerbated by the war in Ukraine.
The policy is reviewed each March. Reeves said on Wednesday that the government will continue the freeze for “a further five months”, but from September 2026 it will be reversed as part of a three-stage approach.
This is expected to take place each financial year, with the levy confirmed to be uprated in line with the Retail Price Index (RPI).
This is expected to ultimately raise fuel duty to at least 57.95p per litre – the rate that has been in place since April 2010 – although the government has yet to confirm.
The OBR said that, in the 2025-26 financial year, fuel duty at its current rate will raise £24 billion (0.8% of GDP) – a 1.6% decrease from 2024-25.
With the freeze removed, it forecasts an increase of £0.2bn (1%) in 2026-27, peaking at £26bn in 2028-29. It predicts that this will then fall by £0.9bn by 2030-31 as EV sales rise.
The OBR said that without the rise, there would be a “fiscal risk from declining fuel duty revenues due to the transition to electric vehicles”.
It predicts the 0.7% share of GDP that fuel duty today contributes will fall to a 0.1% share by 2050-51, when “more than 90% of cars on the road are projected to be fully electric”.
Live petrol prices
New laws are coming into force that will force petrol stations to display fuel prices in real time. This will be part of a new online platform, said Reeves.
She explained: “Because I know that changes in wholesale prices are not always passed down to motorists, I’m bring in new rules to mandate petrol station forecourts to show real time price rises through a new fuel finder, empowering drivers to find the cheapest fuel, calling out rip-offs and strengthening competition.”
She predicted that this will save “the average household” around £40 a year, adding: “I know that the cost of travelling to and from work is still too expensive.”
ECOS changes postponed
Planned changes to employee car ownership schemes (ECOS) have been delayed until 2030, Reeves confirmed.
ECOS, operated mainly by car makers and dealers, allows employees to buy brand-new cars at significantly reduced prices, with low monthly repayment bills and little to no interest charged. Usually, after six months or 6000 miles, the employee then sells the car back and replaces it with another under the same terms.
Reeves previously said the government would bring the scheme “into scope of the benefit-in-kind [BIK tax] rules” from 6 April 2026.
She called ECOS a “contrived car ownership scheme” that “means those benefiting don’t pay company car [BIK] tax”.
However, “to allow more time for the sector to prepare for and adapt to this change”, the end of ECOS has been delayed until 6 April 2030.
ECOS accounts for around 100,000 registrations every year – 5% of the annual new car market.
The scheme is considered by the UK’s automotive industry to be a significant incentive for attracting and retaining talent.
Luxury tax increase for EVs
The cap on the UK’s expensive car supplement – or ‘luxury car tax’ – is being raised for EVs.
Currently all cars priced at £40,000 or more must pay £474 a year for five years, but Reeves said this will be raised to £50,000 for EVs.
She said: “I’m providing support to our British car industry by increasing the threshold for the expensive car supplement on EVs to £50,000.”
This is expected to help more than a million motorists, Reeves claimed.
The new cap will come into force from 1 April 2026 and apply to EVs registered from 1 April 2025.
Extra funding for ECG
The Electric Car Grant (ECG), introduced in July, will be pumped with an extra £1.3bn of funding, confirmed Reeves.
It will also be extended by one year to the 2029-2030 financial year. So far, 35,000 EVs have been discounted through the scheme.
EVs can qualify for either a £3750 (band one) or £1500 grant (band two). Criteria is strict and is centered upon how environmentally friendly the car is to build and the average emissions within the country in which it is produced.
EV charging cost review
The government will review the cost of public EV charging, it said.
It will do so by looking at the impact of energy prices, wider cost contributors and options for lowering costs for consumers.
The review will start in the first quarter of 2026 and a report will be released by the third quarter.
Alongside this, an extra £100m will be used to increase the size of the UK’s EV charging network. This money includes support for installation of home and workplace chargers.
Also, the government is introducing 10-year 100% business rates relief on EV chargers used by UK business.
Motabitily changes confirmed
Reeves confirmed the previously announced news that premium car brands will no longer be available via Motability.
The charity helps disabled people in the UK lease vehicles using their government benefits.
Motability Operations said earlier this week that cars from makers such as Audi, BMW and Mercedes-Benz are being “removed immediately”.
Reeves said the changes were about “getting the scheme back to its original purpose of offering affordable cars to disabled people”.
Source: Autocar
