Car tax revenue 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. The increase in revenue is expected to be driven by the taxation of electric vehicles (EVs). According to the Office for Budget Responsibility (OBR), VED tax receipts are forecast to rise from £8 billion in the current financial year to £10.4 billion in five years' time. This increase is attributed 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.

The OBR has significantly revised its forecast for VED revenue, with an estimated increase of £400 million per year due to higher rates and increased receipts from EVs. By 2028-29, the OBR predicts that the Treasury will generate £10.4 billion in revenue from car taxation alone. The forthcoming Zero Emission Vehicle mandate (ZEV) is also expected to contribute to the upward revisions in VED earnings. The ZEV mandate will set targets for EV sales, starting with 22% of all new models in 2024 being fully electric. Failure to meet these targets will result in fines, but manufacturers can buy EV credits from other brands.

The OBR has also made changes to its forecasts for fuel duty income. The slowdown in the uptake of EVs, partly due to the government's delay in the ban on sales of new petrol and diesel cars, has led to revised expectations for fuel duty receipts. The OBR predicts that revenue from fuel duty will fall by £700 million from the last financial year to £24.4 million in the current term. However, it anticipates a rise to £28.2 billion in 2024-25, taking into account the removal of the 5p-a-litre fuel duty cut and yearly increases in line with RPI inflation.

There are uncertainties regarding the future of fuel duty, especially given the upcoming general election. Motoring experts believe it is unlikely that the Chancellor will both revoke the 5p duty cut and increase the tax. The AA and other organizations are lobbying for fuel duty to remain frozen. Currently, taxation makes up just over half of the price of fuel, with VAT at 20% charged on top of the full price, including the duty amount.

Overall, the changes in VED taxation and fuel duty are expected to have a significant impact on car owners, particularly EV owners. Existing EV owners and those who bought EVs between April 2017 and March 2025 will be subject to VED, while buyers of new EVs from April 2025 will face additional charges. The introduction of the ZEV mandate and the government's plans for the ban on sales of new petrol and diesel cars will shape the future of car taxation and revenue generation for the Treasury.

FutureCar Staff