Tax and electric cars

The rise of electric vehicles could create £30bn tax hole

The Government is being urged to introduce a new road-pricing system, because the increasing popularity of electric vehicles risks leaving a £30 billion hole in public finances each year. 

Research submitted by the Tony Blair Institute for Global Change called for a new system, with options including charges based on emissions, vehicle weight and traffic levels, to replace fuel duty and road taxes.

It said there are currently around 300,000 electric vehicles on our roads, and that number is set to rise rapidly to around three million by 2025, 10m by 2030 and 25m by 2035. 

Currently, electric vehicles are much cheaper to drive and pay virtually no tax, with the average electric vehicle costing just £320 a year to run, compared to £1,100 a year for a typical petrol or diesel car. 

The report said that while the overall cost of running an electric car is 71% lower, the amount paid in tax, most notably fuel duty and vehicle excise duty, is 98% lower.

Instead, the report recommended a new ‘Uberised’ dynamic rate, which could be implemented through fluid real-time pricing, similar to that used by Uber.

Without doing this, tax revenues from car usage will fall by around £10bn by 2030, £20bn by 2035 and £30bn by 2040.

Tim Lord, co-author of the report, said:

“This change [in the loss of tax revenues] might start slowly, but the pace will rapidly increase in the next few years. 

“With each £5.5bn equating to a penny on income tax, compensating for this loss would require the basic rate of income tax to rise by around 6p in the pound – or 2p by the end of the next parliament [in 2029]; a 4.5% increase in VAT; or huge rises in other consumer taxes.”

Not-for-profit group Greener Transport Solutions said earlier this year that a road-pricing system “will be essential” as the country shifts towards electric vehicles.

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