Car tax revenue boost for Treasury

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【Summary】Vehicle Excise Duty (car tax) is projected to generate an additional £2.4 billion per year for the UK Treasury by 2028-29. The increase in revenue is expected to come from the end of exemptions for electric vehicles (EVs) in 2025, resulting in over one million battery cars being subject to annual tax for the first time. The Office for Budget Responsibility has revised its forecasts for car taxation revenue, with estimates suggesting that car tax receipts will rise to £10.4 billion by 2028-29.

FutureCar Staff Nov 26, 2023 5:14 AM PT

Vehicle Excise Duty, commonly known as car tax, is expected to generate an additional £2.4 billion per year for the Treasury by 2028-29. This increase in revenue is 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 being taxed annually for the first time.

The OBR has significantly revised its forecast for VED revenue, with an expected increase of £400 million per year. By 2025-26, car tax receipts are projected to reach £8.8 billion, rising to £9.3 billion the following year and £9.8 billion in the subsequent year. The OBR now forecasts that by 2028-29, the Treasury will generate £10.4 billion from car taxation alone.

The forthcoming Zero Emission Vehicle mandate (ZEV) is also expected to contribute to the increase in VED earnings. This mandate will set binding targets for EV sales, with 22% of all new models sold in 2024 being fully electric. The ZEV mandate provides a roadmap for estimating the revenue increase from VED in the coming years.

There is uncertainty regarding fuel duty, particularly with regards to the 5p cut and the freeze on petrol and diesel taxation. 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 predicts that fuel duty revenue will fall by £700 million from the previous financial year to £24.4 million in the current term. However, it anticipates a significant rise to £28.2 billion in 2024-25, taking into account the removal of the 5p cut and annual increases in line with RPI inflation.

Motoring organizations, such as the AA, have called for a tiered approach to EV taxation, with lower rates for EVs to encourage their adoption. The impact of the VED changes will vary for different groups of EV owners, with existing and new owners facing increased costs. The changes will affect owners of older electric cars, recently-bought EVs, and buyers of brand new EVs differently.

The future of fuel duty remains uncertain, and motoring experts believe that the Chancellor may face challenges in both removing the 5p cut and increasing the tax, especially with a general election approaching. Pump prices for petrol and diesel remain high, and there is concern about the costs associated with going green. The RAC Foundation suggests that it is difficult to predict the future of motoring taxes and calls for clarity to encourage green purchase plans.