EV tax rate changes – what are they, and what do they mean for fleets?

In 2022’s Autumn Budget Statement, Chancellor of the Exchequer, Jeremy Hunt, announced the government’s plans for changes to tax laws around electric vehicles (EVs). In this article, we explore what those changes mean in today’s (2023/24) tax terms for fleet managers and drivers looking to make the switch to EVs. 

The changes, which were widely expected across the industry, mean that from 01 April 2025, owners of zero-emission vehicles (including EVs) will be liable to pay Vehicle Excise Duty (VED), also known as road tax or car tax, in the same way as petrol and diesel vehicle owners.

However, in the same statement, it was also announced that the benefit-in-kind (BIK) tax for EVs will continue to be kept low to increase uptake.

What exactly is changing?

1. Introduction of VED for EVs

New EVs and other zero-emission cars first registered from 01 April 2025 will be liable to pay the lowest first-year rate of VED (currently £10 per year), which applies to vehicles with CO₂ emissions ranging from 1 to 50g/km.

From the second year of registration onwards, zero-emission vehicles will move to the standard annual rate, which is currently set at £180 per year. The standard annual rate will also apply to zero-emission cars first registered between 01 April 2017 and 31 March 2025.

As part of the new measures, the Expensive Car Supplement exemption* for EVs is also due to end in 2025. This means that new zero-emission cars registered on or after 01 April 2025 will be liable for the Expensive Car Supplement.

*The Expensive Car Supplement is currently set at £390 per year and applies to vehicles with a list price of £40,000 or above, and kicks in from the second year of registration for five years. 

2. Maintaining lower BIK tax for EVs

Up until 2021, EV drivers were not eligible for any BIK tax if they selected an EV as their company car. In April 2021, the BIK rate for EV drivers was raised to just 1%. This increased to 2% in 2022, which is currently locked in until 2025.

From 2025, this rate will continue to increase, although only marginally – by a maximum of 1% per year – to encourage continued uptake of EVs in line with global sustainability agendas. That means the BIK tax for EVs will sit at 3% in 2025/26, 4% in 2026/27 and 5% in 2027/28.

2025	2026	2027
3%	4%	5%

What do the changes mean for fleets?

With many vehicles being ordered and kept for three or four years on a typical lease cycle, the announcement of tax changes for zero-emission vehicles over the next five years offers long-term certainty for fleet decision-makers on the road to net zero. This gives much-needed clarity to enable informed decisions, as many fleet managers plan to continue and accelerate their transition towards EVs ahead of the 2035 ban on the sale of new petrol and diesel-powered vehicles.

Specific implications of the tax changes will depend on individual fleets and how they operate. For example, for those operating with a whole-life cost (WLC) model, there will be minimal impact on the fleet operating costs. Instead, it will mean that individual cars may no longer be available within particular employee car bands, which is just as applicable for certain petrol and diesel-powered vehicles as tax is also set to increase for these. However, if your fleet has defined operational cars, there will be a cost implication, as the overall cost of taxing the vehicle will increase.

Despite the proposed changes bringing about incremental increases to tax rates for EVs, in most cases, the costs associated with owning and driving EVs will remain significantly lower than those of the equivalent ICE vehicles. Additionally, it is still likely that there will be a significant BIK variance between EV and petrol or diesel-powered vehicles, even beyond 2028. As a result, the incentive for fleets to switch to EVs, especially when considering WLC calculations, is still very much prevalent.

Managing the transition to EVs

The switch to EVs is – to a large extent – inevitable. As many fleet decision-makers plan for upcoming tax changes to continue on the trajectory towards an all-electric fleet, securing driver buy-in remains critical, and minimising disruption during the switch with strategies around charging, reimbursement and necessary infrastructure can help.

VWFS Fleet has put in place several bespoke tools, which are specifically designed to support fleets in overcoming these challenges and smoothing their transition from petrol and diesel vehicles to EVs: 

• Help is available from our expert team on all aspects of the transition, from building an effective environmental, social and governance (ESG) strategy to minimising Scope 1, 2 and 3 emissions.
  
• More specifically, our Fleet Transition Survey Tool will help you to understand which of your drivers will benefit most from switching to an EV now, and which of them may need to make different adjustments to smooth the transition. Completing this will allow us to share findings and detailed insights, which will help you in shaping your strategy.
  
• Meanwhile, our EV-4-ME tool contains a set of questions that will allow you to make the best decision on what type of vehicle is right for each of your users right now – whether that’s an EV or a vehicle using a different type of fuel.
  
• Finally, our fuel cost comparator tool enables you to compare the fuel costs of electric vehicles versus petrol or diesel alternatives, for any type of vehicle and any given mileage. Our tool offers various EV charging options, including home and ultra-rapid public charging points, enabling you to compare the charging infrastructure you already have or plan to put in place.

Rest assured; you are not alone in navigating the transition to electric vehicles for your fleet. Regardless of the size of your fleet, VWFS Fleet is committed to assisting every step of the way.