Potential Pay-Per-Mile Road Tax: What It Means For UK Drivers
In a move that could significantly impact UK motorists, the government is considering introducing a pay-per-mile road tax system. This potential change, which could be announced in the upcoming October 2024 Budget, has sparked discussions about the future of vehicle taxation in the UK.
At The Electric Car Scheme, we're committed to helping you understand how these changes could affect your journey to net zero. Let’s explore what this may mean for drivers across the UK.
A Shift In Gear: From Flat Rate To Pay-Per-Mile
UK drivers currently pay a flat, yearly rate of £190 for road tax after the first year, based on CO2 emissions. However, with electric vehicles set to become subject to road tax from April 2025, the government is exploring ways to create a fairer system that encourages the transition to cleaner vehicles.
Thom Groot, CEO and Co-founder of The Electric Car Scheme, explains: "The potential introduction of a pay-per-mile system represents a significant shift in how we think about road taxation. It's a move that could have far-reaching implications for all drivers, especially those considering the switch to electric vehicles."
The Road Ahead: Potential Costs and Impacts
While the government has not officially confirmed the introduction of a pay-per-mile system, early estimates suggest that drivers could be charged up to 15p per mile. For the average UK motorist driving 7,000 miles a year, this could mean an annual fee of £1,050 - a substantial increase from the current flat rate.
"If implemented, this change could significantly impact driving costs for many UK motorists," Thom Groot notes. "It's particularly concerning for those in rural areas who rely heavily on their vehicles for daily activities, as well as younger drivers who are already facing high motoring costs."
How Will Pay-Per-Mile Work?
As discussions around the pay-per-mile system continue, many UK drivers are wondering how such a system might be implemented. While the government has not released official details, we can look at similar systems and proposals to get an idea of how it might work.
Based on what we've seen in other countries and previous proposals, a pay-per-mile system would likely involve some form of mileage tracking. This could be done through various methods, each with its implications for drivers.
Potential Implementation Methods Could Include:
Annual Odometer Readings: Drivers might be required to report their annual mileage when renewing their vehicle tax or during MOT tests.
Telematics Devices: Small devices could be installed in vehicles to track mileage more accurately.
Smartphone Apps: Drivers might use government-approved apps to track their mileage.
Fuel Duty Adjustment: The system might involve a reduction in fuel duty, offset by a per-mile charge.
Regardless of the method chosen, it's crucial that any implemented system is fair, transparent, and respects drivers' privacy.
Accelerating The Transition To Electric
Despite these potential changes, the shift towards electric vehicles continues to gain momentum. The government has set ambitious targets for manufacturers, requiring a minimum percentage of their sales to come from electric vehicles - starting at 22% by the end of this year and reaching 80% by 2030.
What’s Next?
As we approach the October 2024 Budget, all eyes will be on the government's announcements regarding road taxation. While a pay-per-mile system could present challenges, it also offers an opportunity to rethink our approach to vehicle use and ownership.
Additional Considerations: Upcoming VED Changes
While the potential pay-per-mile system is grabbing headlines, it's worth noting that other changes to vehicle taxation are already on the horizon. From 1 April 2025, electric and low-emission vehicles will be subject to Vehicle Excise Duty (VED) in the same way as petrol and diesel vehicles.
While these VED changes might seem to contradict efforts to encourage EV adoption, they reflect the need for a fair taxation system as more drivers make the switch to electric. It's important to remember that the overall running costs of EVs, including lower fuel and maintenance costs, still make them an attractive option for many drivers.
Key Points Of The VED Changes Include:
New electric cars registered from 1 April 2025 will pay the lowest first-year rate, then the standard rate (currently £190) from the second year.
Electric cars registered between 1 April 2017 and 31 March 2025 will pay the standard rate.
The £10 annual discount for hybrid and alternatively fuelled vehicles will be removed.
Whatever the outcome of these various tax changes, at The Electric Car Scheme, we're committed to making the transition to electric vehicles as smooth and affordable as possible for everyone.
Second-hand cars are treated in the same way as new cars. The list price is the price outlined above on the day before the car was first registered (when the car was new).
How VED Changes Work At The Electric Car Scheme
Given the expected timing of your vehicle, there is a high chance your car will be subject to an additional road tax, known as the Expensive Car Supplement which sits under the VED system. This tax is levied when the cost of your vehicle exceeds the current government threshold of £40,000.
The supplement, currently set at £410, will be applied to your gross salary sacrifice as it becomes due. Both the supplement amount and the threshold at which it applies are subject to change in line with any future government adjustments.
The Silver Lining: Benefit-in-Kind Savings For EV Drivers
While discussions about pay-per-mile taxation and VED changes may seem daunting, there's a significant advantage for electric vehicle drivers that shouldn't be overlooked: Benefit in Kind (BiK) tax savings.
Despite potential changes in road taxation, the Benefit in Kind rates for electric vehicles remain attractive. This can lead to substantial savings for employees who choose an electric car through a salary sacrifice scheme.
Here’s How BiK Works For Electric Vehicles
Low BiK Rates: For the 2024/25 tax year, the BiK rate for electric vehicles is just 2%. This rate is significantly lower than for petrol or diesel vehicles, which can have BiK rates of up to 37%.
Salary Sacrifice Advantages: When you get an electric car through a salary sacrifice scheme, you pay for it from your gross salary. This means you save on income tax and National Insurance contributions.
Substantial Savings: The combination of low BiK rates and salary sacrifice can result in savings of 30-60% compared to personally leasing or buying an equivalent electric vehicle.
For example, if you’re a higher-rate taxpayer choosing a popular electric vehicle model. Through our salary sacrifice scheme, you could save over £3,000 per year compared to a personal lease. That's a significant saving that offsets potential increases in road tax or future pay-per-mile charges.
Moreover, the government has confirmed that BiK rates for electric vehicles will rise by only 1% per year until 2028, reaching a maximum of 5%. This provides certainty for employees and employers looking to make the switch to electric.
"While we're keeping a close eye on potential changes like pay-per-mile taxation, it's crucial to remember that the overall financial picture for electric vehicles remains very positive," Thom emphasises. "Between lower fueling costs, reduced maintenance needs, and these significant tax advantages, electric vehicles continue to offer compelling value for many drivers."
If you’re interested in exploring how an electric car salary sacrifice scheme can benefit you - whether as an employee looking to participate or an employer considering implementation - visit our website for more information.
Last updated: 02/10/24
