Electric car drivers face new £2k luxury tax

Hefty surcharge raises questions over Labour’s commitment to its net zero drive

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Drivers of new electric cars face paying £2,125 in luxury vehicle tax from next year in a move that is “at odds” with the Government’s net-zero agenda.
Electric vehicles (EVs) registered from April 1 will attract an additional levy, known as expensive car supplement, if priced above £40,000.
The hefty surcharge, which costs £425 a year, is payable annually between the second and sixth years of a car’s lifespan, even if the vehicle’s ownership changes hands.
Zero-emission motors have been exempt from the levy since 2020, but Tory plans to bring them back into the fold from April are being followed through by Labour.
Its pending introduction has raised questions over the Government’s commitment to its net zero drive.
Steve Brown, of tax firm RSM, said: “The introduction of higher taxes on electric car purchases may well be counter-productive and appears at odds with the Government’s ambitious plans to reduce the country’s carbon emissions.
“Zero-emission cars can already come with a premium price tag and some may feel they are paying a penalty for trying to do the right thing.”
Sir Keir Starmer wants to phase out the sale of internal combustion engine cars by 2030 and ban hybrids by 2035.
Yet, with EVs typically being a third more expensive than combustion powered vehicles, the majority of drivers thinking of going electric will be saddled with the levy.
Figures from Auto Trader show that 67pc of EVs surpass the £40,000 threshold, meaning potentially hundreds of thousands of drivers face paying the extra tax.
So far this year, 300,000 electric motors have been bought in the UK, according to the Society of Motor Manufacturers and Traders (SMMT).
The expensive car supplement is paid in addition to normal car tax, vehicle excise duty (VED), which will also undergo rate changes from April.
Rachel Reeves revealed in the Budget that petrol and hybrid drivers will pay at least £100 more in tax as part of a £1.6bn raid on motorists.
The highest polluting vehicles stand to pay double vehicle excise duty at £5,490 in the first year.
EV owners will also start paying traditional road tax, parting with £10 in the first year. After that point, they will pay a standard yearly amount – currently £190 – that will increase in line with retail price inflation.
While no longer benefiting from an exemption, the lower VED rates offered to electric cars were mostly welcomed by the sector.
However, Ian Plummer, of Auto Trader said it is a “shame” Labour has not made changes to the luxury car policy.
He said: “The changes to VED promoting lower emission vehicles in the recent Budget announcement is exactly the kind of government action we need to see more of, so it’s a shame, when we’re aiming for a fair and equal transition, the expensive car supplement hasn’t seen such treatment.
“EVs will feel the full brunt of this policy.”
In last month’s Budget, the Government said it will “consider” raising the threshold for zero-emission cars, but “only at a future fiscal event”.
It conceded that from April the luxury tax will have a “disproportionate impact” on those buying electric cars. However, there is no timeline for when changes will be considered.
Mr Brown, of RSM, added: “While the Government has identified this is a potential issue, it’s not clear why a decision has been kicked down the road.
“It could deter some from making a purchase until there is more certainty and slow the growth of sales of new electric vehicles.”
While 37,000 more EVs have hit the road in 2024 compared with last year, the total share of sales only equates to 18pc of the new car market.
This is below the Government’s zero-emission vehicle (ZEV) mandate of 22pc, which rises to 28pc next year.
Manufacturers have been slashing prices in an effort to sell, yet the average cost of an EV remains north of the luxury car tax threshold. The UK’s most popular electric motor, the Tesla Model Y, starts at £46,990.
The levy is triggered when a car’s list price, including optional extras, surpasses £40,000. If the buyer negotiates a discount on the purchase, this is not taken into account.
Had the threshold risen in line with inflation since its introduction in 2017, the tax would be triggered at £51,827.
The Institute for Fiscal Studies has previously branded the levy an “odd and arbitrary way to tax the well-off”.
A Treasury spokesman said: “From April 2025, electric cars will begin to pay VED in a similar way to petrol and diesel cars, ending the exemption for electric cars from the expensive car supplement.
“We recognise the need to ensure EVs are affordable as part of our ambitions for net zero, so we will consider raising the threshold for zero emission cars at a future fiscal event.”
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