UK Government Considers Luxury Car Tax Break for EVs
The UK government is reportedly looking into increasing the threshold for the 'luxury car tax' on electric vehicles (EVs). This move aims to incentivize EV adoption by making higher-priced electric cars more financially attractive.Currently, the Expensive Car Supple-ment (ECS) applies to all vehicles, including EVs from April 1, 2025, if their list price exceeds £40,000. This supple-ment adds an extra £425 annually to the Vehicle Excise Duty (VED) for years two through six of ownership.
When combined with the standard annual VED rate of £195 (which also applies to EVs from their second year), cars priced above £40,000 face a total tax bill of £3,100 over the first six years. The proposed change would mean that more expensive EVs would no longer be subject to this additional charge.
The current "luxury car tax" scheme, which applies the Expensive Car Supple-ment (ECS) to vehicles priced over £40,000, has drawn criticism for hindering electric vehicle (EV) adoption. This is particularly relevant as the average EV cost significantly exceeds this threshold, with some sources estimating it to be around £50,000. Critics argue that the tax is at odds with the government's Zero Emission Vehicle (ZEV) mandate, which requires manufacturers to achieve a 28% EV sales mix this year, escalating to 80% by 2030.
Recent figures highlight the challenge: in April, EVs constituted only 20.4% of new car registrations, falling short of last year's ZEV mandate target of 22%. Furthermore, EVs currently account for a mere 10.7% of private car sales, intensifying calls for government incentives to encourage individual buyers to switch to electric.
Industry leaders have voiced their concerns. Eurig Druce, Stellantis UK boss, told Autocar: “We’d like to see a review of this new taxation, with a raised threshold, so that UK drivers have fewer barriers in order to make the switch to electric cars." Similarly, Ford criticized the government's decision to impose Vehicle Excise Duty (VED) on EVs while simultaneously penalizing manufacturers for not meeting sales targets, stating: "Introducing VED for EVs from April risks slowing adoption at a crucial time for the industry."
However, there's a new indication that the government is considering an adjustment to the ECS scheme. This could significantly reduce VED costs for a large number of EVs currently available in the UK. Lilian Greenwood, Minister for the Future of Roads, in a letter to a local MP seen by Autocar, confirmed that measures are being explored to facilitate the achievement of mandated sales mixes in the coming years.
She wrote: "As announced at Autumn Budget 2024, the Government recognises the disproportionate impact of the current VED Expensive Car Supple-ment threshold for those purchasing zero emission cars from 1 April 2025. We will consider raising the threshold for zero-emission cars only at a future fiscal event to make it easier to buy electric cars."
Minister Lilian Greenwood did not specify when the proposed "fiscal event" to adjust the EV tax threshold would occur, though the Autumn Budget is typically announced in October. Autocar has reached out to the Department for Transport (DfT) for additional comments.
The period leading up to April 1, 2025, saw a significant surge in EV sales, with a 41.7% year-on-year increase and a 25.3% market share. This rush was likely driven by the impending application of the ECS to electric vehicles. However, the following month, despite manufacturers lowering prices of several electric models to below £40,000 to avoid the ECS, EV market share dropped to 20.4%.
While a new wave of more affordable electric cars from manufacturers like Stellantis, Volkswagen Group, and Renault are expected in the next two years, EVs generally remain significantly more expensive than their petrol or diesel counterparts. This is largely due to the higher cost of batteries compared to traditional engines. For example, the BMW i4 saloon starts at £51,280 in the UK, while the cheapest 3 Series saloon is £41,875. Similarly, the new Volkswagen ID 7 Tourer begins at £51,795, whereas the similarly sized Passat estate costs £39,840.
These price differences between equivalent EV and internal combustion engine (ICE) models are a major barrier to EV adoption, especially for private buyers. Fleet buyers, on the other hand, benefit from Benefit-in-Kind (BIK) tax advantages, which significantly reduce the premium they pay for EVs.
The government recently made adjustments to the ZEV mandate framework after consulting with manufacturers to make the targets more achievable. These changes included allowing hybrid cars to remain on sale post-2030 and simplifying the emissions credits trading scheme. However, the ECS threshold was notably absent from these modifications.