Car tax revenue boost for Treasury

author: FutureCar Staff    

Vehicle Excise Duty (VED), commonly 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). According to the Office for Budget Responsibility (OBR), VED tax receipts are forecasted 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, resulting in over one million battery car owners being subject to annual tax for the first time.

The OBR has revised its forecasts for car taxation revenue, with the VED sting on EV owners being a significant talking point. The committee predicts that VED could provide one of the largest tax receipt increases for the Treasury by the end of the decade. In the last financial year, VED contributed £7.3 billion to the Treasury's coffers. This year, it is estimated that VED will rise by approximately £700 million due to increased rates. However, the acceleration in car tax receipts is expected to occur from 2025 when EV owners will no longer be exempt from taxation.

The forthcoming Zero Emission Vehicle mandate (ZEV) is also expected to contribute to the upward revisions of VED earnings. Starting from next year, the ZEV mandate will set binding targets for EV sales, with 22% of all new models sold in 2024 being fully electric. The OBR has used the ZEV mandate as a roadmap to estimate the increase in revenue from VED towards the end of the decade.

In addition to VED, there are uncertainties surrounding fuel duty. The OBR has made changes to its forecasts for fuel duty income based on a slower uptake of EVs, partly due to the government's delay in implementing the ban on sales of new petrol and diesel cars. The OBR expects revenue from fuel duty to fall by £700 million from the previous 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 annual increases in line with RPI inflation.

The AA and the RAC Foundation have both expressed concerns about the potential impact of these changes on motorists. The AA has called for a tiered approach to VED, with lower rates for EVs to encourage their adoption. Meanwhile, the RAC Foundation believes it is unlikely that the Chancellor will both revoke the 5p duty cut and increase the tax with a general election on the horizon. The uncertainty surrounding motoring taxes may deter consumers from purchasing electric vehicles until there is greater clarity on costs and taxation.

FutureCar Staff