Car tax boost for Treasury

author: FutureCar Staff    

Vehicle Excise Duty, also known as car tax, is projected to generate an additional £2.4 billion per year for the Treasury by 2028-29. This increase in revenue is expected to be driven by the taxation of electric vehicles (EVs). The Office for Budget Responsibility (OBR) predicts that VED tax receipts will rise from £8 billion in the current financial year to £10.4 billion in five years' time. This is due to higher duty rates and the end of VED exemption for EVs in 2025, which will result in over one million battery car owners having to pay annual tax for the first time.

In addition to changes in VED revenue, adjustments have also been made to estimations of revenue from fuel duty. However, the decision to increase fuel duty would depend on the Chancellor reversing the 5p cut and ending the 13-year freeze on petrol and diesel taxation, which may not be wise in an election year.

The OBR's economic and fiscal outlook report highlights the significant impact that VED will have on the Treasury's tax receipts. With the introduction of the Zero Emission Vehicle (ZEV) mandate from next year, car manufacturers will be required to meet binding targets for EV sales. The OBR has used this mandate as a roadmap to estimate the increase in revenue from VED by the end of the decade.

The expectation is that there will be a surge in car tax receipts from 2025 onwards, as EV owners will no longer be exempt from taxation and discounts for hybrid vehicles will be reduced. With the number of EVs on the road expected to reach one million by February and an estimated 325,000 UK sales per year, there will be at least 1.3 million cars that will become taxable for the first time by March 2025. As a result, the OBR has revised its forecast for VED revenue, projecting an increase of £400 million per year.

By 2028-29, the OBR predicts that the Treasury will generate £10.4 billion from car taxation alone. The forthcoming ZEV mandate and the end of VED exemption for EVs are key factors contributing to the upward revisions in VED earnings. The OBR's document states that the main policy driver for EV uptake is now the ZEV mandate, which will take effect in January 2024. The OBR has adjusted its EV assumption to align with the path of the mandate over the forecast horizon.

While the increase in VED revenue will have a significant impact on existing and new EV owners, there are calls for a tiered approach to VED, with lower rates for EVs. The AA has written to the government advocating for this approach, suggesting that it would encourage consumers to choose EVs while still contributing to road maintenance.

In addition to VED, the future of fuel duty remains uncertain. The OBR has made changes to its forecasts for fuel duty income based on a slowdown in EV uptake and the delay in the ban on sales of new petrol and diesel cars. The OBR anticipates a fall in revenue from fuel duty, but expects a dramatic rise in 2024-25 due to the removal of the 5p cut and the annual increase in fuel duty in line with RPI inflation. However, the decision to increase fuel duty is yet to be determined.

Overall, the future of car taxation and fuel duty in the UK remains uncertain, with potential changes and revisions expected in the coming years.

FutureCar Staff