The Daily Telegraph has reported that electric vehicle (EV) drivers will be hit with a new pay-per-mile tax in the Budget. Needless to say, this is not going down well with motorists, especially in rural areas, with some already describing it as a ‘poll tax on wheels’. But the context is important.
In my view, pay-per-mile charges for EVs would be a fair way to replace the revenues that are being lost as a result of the transition from petrol and diesel. This problem is long-standing (see this box from the November 2023 EFO) and should be well known. In short, annual revenues from conventional fuel duty are expected to fall from around £25 billion now to zero by 2050.
Moreover, Rachel Reeves is facing a further challenge in this month’s Budget. One point almost everybody has missed is that the OBR’s forecasts already assume that the Government will raise an extra £4.6 billion in 2029-30 from ending the freeze on fuel duty and reversing the ‘temporary’ 5p cut.
This assumption is based on the Government’s current policy. The October 2024 Budget only extended the temporary cut in fuel duty (first introduced at the Spring Statement in March 2022) for a further 12 months, meaning it is due to end on 22 March 2026.
The planned increase in line with inflation for 2025 to 2026 was also cancelled, but again just for this one year.
Sooner or later the Chancellor is going to have to bite the bullet on fuel duty, or else find more savings elsewhere. The cost of extending both the freeze and the 5p cut for ‘just one more year’ would not be the full £4.6 billion in 2029-30, as long as the OBR still assumes that both policies will be reversed in 2027 or 2028. The Chancellor will also be reluctant to do anything that might add to headline inflation.
But this risks stretching fiscal credibility even further. And if she does announce an increase in fuel duty now, the increase need not actually kick in until late March 2026, when inflation should be lower.
There is therefore still a good chance that she will meet the OBR halfway this month and end the ‘temporary’ 5p cut in fuel duty, raising about £3 billion a year. The Treasury is already preparing the ground for this by claiming – without evidence – that the 5p cut is no longer being passed on to motorists anyway.
Whether she does this or not, she seems likely to announce plans to introduce pay-per-mile EV taxes in 2028-29, so this hit at least will be delayed. This could initially raise about £2 billion a year.
The details would emerge after a consultation period. But the frontrunner is an annual charge based on the mileage recorded at an annual MOT-style check, with lower rates for hybrid vehicles.
There would therefore be no need for major new ‘road pricing’ infrastructure. It would also be relatively simple to use some sort of onboard ‘black box’ technology, but the inevitable privacy concerns probably rule this out.
Crucially, this would be about levelling the playing field between people driving EVs and those driving petrol or diesel vehicles, regardless of whether they live in rural or urban areas. A tax on the distance travelled is not the same as a tax on the amount of fuel required, but they are sufficiently similar for this purpose.
Overall, then, this seems a fair and pragmatic solution to some genuine problems.
Nonetheless, it is still far from perfect. It is reasonable to ask whether it would be better to tax motorists less and raise more money instead from general taxation.
In principle at least, there is strong case for charging motorists something more to reflect the costs of maintaining the road network, and other social costs (‘externalities’) such as pollution and congestion. But this still begs some important questions.
In particular, can the total amount raised specifically from motorists actually be justified by the specific costs associated with motoring? Is a crude pay-per-mile charge really the best way to reflect these costs? Would the new tax regime still provide the right incentives to switch to EVs (assuming, of course, that that would be a ‘good thing’)?
But these are questions for another day. Suffice to say now that there is no good reason why EV drivers should bear less of a burden – at least for most of these costs – than people who happen to drive petrol or diesel cars.
For once, then, I think Rachel Reeves is on the right road.
ps. you can follow me on X (formerly Twitter) @julianhjessop and BlueSky @julianhjessop.bsky.social. I also post regularly on Substack at https://substack.com/@julianhjessop.
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