Electric car tax explained: how the EV tax burden is about to get heavier

Electric car buyers have had things pretty good since the first models started hitting the road in the early 2010s. While the government no longer offers the hefty £5,000 grant it did for someone buying an electric vehicle (EV) back in 2011, owners have so far been able to avoid Vehicle Excise Duty (VED) or ‘road tax’ altogether, including the surcharge on more expensive cars.

No longer. From April 1, 2025, electric cars will attract VED just like any other car. There’ll be no significant saving after the first year either, as new EV buyers will also be subjected to the full brunt of the expensive car supplement, which adds hundreds to your road tax bill in the years following first registration.

The tax increases come at a time where advocates and car manufacturers alike are already concerned by a slowdown in electric vehicle sales among private buyers in particular, as the government ramps up sales targets for EVs ahead of its 2030 ban on the sale of petrol and diesel vehicles.

Below we look at the different taxes that electric cars will be subject to when the new rates come into effect in January, and which electric cars are set to be hardest hit.

What taxes do electric cars attract?

From the first of April 2025, electric cars will be subject to all the same taxes as their combustion counterparts, just at different rates depending on the age of the car, and whether it’s privately owned or being run as a company car.

For private buyers, the most significant tax is Vehicle Excise Duty, also known as VED, car tax, or simply ‘road tax’. This must be paid when a vehicle is first registered, and annually thereafter. From April 2025 EVs costing more than £40,000 will also now attract the expensive vehicle supplement.

Company buyers will be familiar with Benefit-in-Kind or BiK taxation, and this has applied to EVs for many years, albeit at a much lower rate than for cars with tailpipe CO2 emissions. Finally, all cars, electric or otherwise, are subject to Value Added Tax, or VAT, at the point of sale.

Vehicle Excise Duty

Vehicle Excise Duty, commonly known as road tax, will be familiar to anyone who’s owned a new or used vehicle. It’s an annual fee payable from the moment a car is registered, and every year thereafter when a car is kept on the road.

That is, unless you bought an electric car, as these have previously been exempt from all VED charges, both at first registration and in subsequent years. From April 1 that changes, with new rules affecting both new and older EVs.

New electric cars will be subject to a tax charge of £10 in the first year, and the standard annual road tax rate in subsequent years - that standard annual rate currently stands at £195, but is subject to any changes announced in annual government budgets. New EVs will also be subject to the expensive car supplement (see below).

If you own an EV registered between 1 April 2017 and 31 March 2025 and have been benefitting from zero road tax, the bad news is that from April 2025 your car also becomes liable for the £195 standard annual rate. If you have an earlier electric car that was registered prior to 31 March 2017 you’ll also lose your zero-rated road tax, but will only have to pay VED at £20 per year from April 2025.

VED luxury car supplement

As well as getting a free pass on road tax, EVs were previously exempt from the expensive car supplement applied to other cars that cost more than £40,000. For anyone buying a new EV from April 2025, this will be the most significant tax increase they’ll face under the new tax regime.

The supplement, currently £410 a year, increases to £425 per year from 1 April, and applies for five years from the car’s second birthday – i.e. years two to six. So EVs that would previously have been free to tax will now cost private buyers a whopping £620 per year from year two onwards. This is because they’ll pay the £425 surcharge on top of the standard £195 annual rate.

It’s not a small number of vehicles that’ll be affected, either, as EVs tend to be quite expensive brand new. Given the range starts at more than £39,500, most Volkswagen ID.4s will attract this new higher tax rate for instance – and that’s just a sensible electric SUV, not something most people would consider a luxury car.

This is worth bearing in mind for used car buyers too. It’s not always easy to find out what the used car you’re buying cost when it was brand new, so it’s worth running a car’s registration through an online car tax calculator to see how much it might cost in advance.

Owners of EVs worth more than £40,000 registered before April 2025 will at least be spared from paying the expensive car supplement – though of course after that date they’ll still have to pay the standard £195 annual rate.

Benefit-in-Kind

With their employer footing the bill for road tax, the cost company car users are most concerned by is Benefit-in-Kind taxation, abbreviated to BiK. This works out a tax rate based on three factors: the cost of the car, whether you’re a lower or higher rate taxpayer (i.e. pay tax at the standard 20 per cent rate, or the higher 40 per cent rate of income tax), and a BiK percentage rate.

This latter figure has been 2 per cent for EVs for a few years now, but increases to 3 per cent from April. This obviously means it’ll cost a little more in tax to run a company car, but given this rate is already far lower than for cars with higher CO2 ratings, running an EV as a company car is still incredibly cost-effective – the difference between a petrol BMW 3 Series and an electric BMW i4 for instance is measured in the thousands of pounds.

VAT

Most things you buy or services you use in the UK attract Value Added Tax, or VAT, typically at a rate of 20 per cent. If a car costs £20,000 before VAT, then the on-the-road price (ignoring registration costs and other peripheral car-buying costs) will be £24,000.

Some products and services are exempt from VAT – most food and drink (excluding sweets, alcohol, soft drinks and the like), sports activities, gambling, most healthcare products, and education are either exempt or zero rate, while things like domestic energy and heating products are subject to a much lower 5 per cent rate.

Electric cars get neither exemption, nor a lower rate, so are currently subject to the full 20 per cent whack, just the same as any other car whatever its power source. However there is an interesting VAT variation for EV drivers when it comes to charging costs - those drivers with home chargers use ‘domestic’ energy VAT rated at 5 per cent, while anyone using public charging has to pay the standard 20 per cent VAT rate.

There’s currently a push from within the industry to rate public charging VAT at 5 per cent, and to VAT on EV purchases to encourage their adoption; both the Society of Motor Manufacturers and Traders (SMMT) and some car company executives have called for VAT to be halved, cutting the up-front cost of EVs by thousands of pounds (the SMMT estimates around £4,000 on average).

With EVs now being subject to higher VED costs, we’re sure to see renewed interest in trying to slash their cost in other ways in order to incentivise adoption, and VAT does appear to be one of the more obvious ways of doing this. However, it’s unlikely to be popular with the government as it tries to balance the public purse, especially with the prospect of falling tax revenues from petrol and diesel as more EVs hit the road.

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