UK BUDGET 2024: COMPREHENSIVE ANALYSIS OF VEHICLE TAX CHANGES AND IMPACT ON DRIVERS
The recent Autumn Budget, presented by Labour’s Chancellor Rachel Reeves – the first female chancellor to present a budget in a red box – introduces significant changes to vehicle taxation and incentives in the UK.
The proposed changes are part of broader efforts to incentivize the transition to zero-emission vehicles as part of the government’s environmental objectives. These modifications extend tax benefits for fully electric cars while increasing tax liabilities for other vehicle types like PHEVs and combustion cars.
COMPANY CAR TAX BENEFITS
Electric vehicles (EVs) have received considerable attention in the 2024 Autumn Budget, with several measures introduced to encourage their adoption. EVs currently benefit from a low benefit-in-kind (BIK) tax rate of 2%, which is significantly lower compared to petrol or diesel vehicles whose rates are around 25%.
Alex Grant at Autocar explained BIK tax particularly well: “Company car tax has incentivised low-CO2 vehicles since 2002. The benefit of having a car for personal use has what’s called a taxable value – a percentage of the car’s list price, weighted according to its CO2 emissions and, for most plug-in hybrids, electric-only range. In turn, drivers’ benefit-in-kind (BIK), which is paid at the same rate as their income tax band (typically 20% or 40%), and employers’ Class 1A National Insurance Contributions (a flat 13.8%, rising to 15.0% next April) are both calculated as a share of the taxable value. Since 2020, electric cars have been taxed at ultra-low rates, currently 2%, providing a 90% tax saving compared with a petrol or diesel vehicle.”
This low rate for EVs will still undergo gradual increases, rising to 5% by April 2028, then to 7% in 2028/29, and up to 9% in 2029/30. This incremental rise is intended to maintain incentives for EV adoption in corporate fleets and salary sacrifice schemes, encouraging greener updates over traditional vehicles.
The BIK tax will follow a gradual increase:
– 3% in 2025/26
– 4% in 2026/27
– 5% in 2027/28
– 7% in 2028/29
– 9% in 2029/30
This progressive increase maintains significant advantages over conventional vehicles, whose rates can reach up to 39% by 2029/30. For perspective, a company car driver in the 40% tax bracket could save approximately £4,640 annually by choosing an electric vehicle over a petrol car emitting 131g/km of CO2.
VEHICLE EXCISE DUTY (VED)
Starting from April 2025, there will be an increasing difference in VED rates between fully electric and other vehicles. Zero-emission vehicles will benefit from the lowest first-year VED rate of £10, which will remain in place until 2029/30. The government has also indicated a willingness to reassess the expensive car supplement under VED, suggesting that the threshold for zero-emission vehicles may be raised in future fiscal discussions to encourage electric vehicle purchases.
IMPACT ON HYBRID VEHICLES – TAX RATE INCREASES
While fully electric vehicles continue to enjoy favourable treatment, plug-in hybrid electric vehicles (PHEVs) will face increased taxation.
As the RAC wrote:
“The biggest news is the ten-fold increase in first-year car tax rates for cars emitting between 1-50g/km of CO2, which includes hybrids. These will increase from the current rate of £10 for petrol and diesel cars (or zero for hybrids) to £110. The vast majority of plug-in hybrid cars fall into this band.”
PHEVs will experience notable tax hikes under the new budget. From April 2028, new regulations will impose a flat 18% BIK tax on PHEVs emitting 1g-50g/km of CO2, further increasing to 19% in 2029/30. This constitutes a steep rise for many hybrid vehicles, currently benefiting from lower rates. For instance, PHEVs like the Volkswagen Golf eHybrid, which currently have an electric-only range of 88 miles and a tax rate of 8%, will experience a rise to 18%, translating to an increased monthly BIK cost for a 20% taxpayer from £49 to £111.
For PHEVs that can travel at least 130 miles on battery power, the BIK tax will jump from 5% to 18%, although no vehicles currently meet this criterion.
Fleetnews.co.uk wrote:
”In a move which will significantly impact drivers of plug-in hybrid company cars, the appropriate percentage rates for vehicles which produce 1g to 50g CO2 per kilometre and are also capable of operating on electric power within a certain range will be amended.
Vehicles with CO2 emissions of 1g to 50g per kilometre will have appropriate percentages of 18% in 2028/29 and 19% 2029/30.
For a PHEV capable of up to 69 miles zero-emission driving, that will mean a seven percentage point year-on-year increase in BIK.
The appropriate percentages for all other emission bands will increase by one percentage point per year in 2028/29 and 2029/30.
This will be to a maximum appropriate percentage of 38% for 2028/29 and 39% for 2029/30”
ThisIsMoney.co.uk had a good illustration for why any company car is likely to be electric:
“Taking a £40,000 electric car as an example and a 40 per cent tax bracket employee, you can save thousands of pounds by choosing an EV company car rather than a fuel one.
The EV owner will pay in tax 40 per cent of two per cent of their £40,000 a year income.
This comes to £320 a year, or £26.67 a month.
A petrol car that emits 131g/km of CO2 such as a Skoda Scala SE will instead pay 31 per cent BiK this financial year.
31 per cent of £40,000 is £12,400, leaving a Scala-owning 40 per cent tax-bracket employee paying almost £5k a year (£4,960) in tax, or £413.33 a month.
That puts company car tax savings for an EV versus a petrol car at a massive £386.66 a month or £4,640 a year.”
Changes to Vehicle Excise Duty (VED) will commence in April 2025, expanding the tax gap between zero-emission and other vehicles. Whilst EVs will preserve their lowest first-year VED of £10 until 2029/30. Rates for vehicles with higher emissions will see stark increases thereafter, with hybrids emitting between 1-50g/km CO2 facing first-year VED of £110 starting in 2025/26, and even greater hikes for higher-emission vehicles.
– First-year VED for vehicles emitting 1-50g/km CO2 will increase to £110
– Vehicles emitting 51-75g/km will face a £130 charge
The budget also avoids an increase in fuel duty by extending its freeze, which continues the trend of avoiding inflation-linked increases, a policy criticized by environmental groups for contributing to a 7% rise in CO2 emissions. Indeed, maintaining the freeze on fuel duty, while prolonging the 5p cut is estimated to have saved drivers an average of £59 in the upcoming year, providing temporary economic relief from rising living costs. However, this freeze has been criticized for contributing to higher CO2 emissions and costing the Treasury £100 billion since 2010
BUSINESS FIRST YEAR ALLOWANCES
The 100% First Year Allowances for electric vehicles and charging stations have been extended for another year. This measure allows businesses to deduct the full cost of these investments from their pre-tax profits, providing a significant financial incentive for EV adoption.
CONVENTIONAL VEHICLE CHANGES
### First-Year VED Increases
From April 2025, vehicles emitting more than 76g/km CO2 will see their first-year VED rates double. Examples include:
– A VW Golf 1.5 TSI owner will pay an additional £220
– A BMW X5 M60i will incur an extra £2,745
– A V8 petrol Range Rover (255g/km+ emissions) will see first-year tax jump from £2,745 to £5,490
– A 1.2-liter hybrid Vauxhall Corsa (102g/km) will face an increase from £195 to nearly £400
DOUBLE-CAB PICK-UP CHANGES
Double-cab pick-ups, which were previously enjoying lenient tax treatment, will now be classified as passenger vehicles for tax purposes from April 6, 2025. This means their BIK and National Insurance Contributions (NIC) will be calculated based on CO2 emissions instead of a flat rate, significantly increasing tax liabilities. An example is the Ford Ranger XLT, with a new monthly BIK increase for a 20% taxpayer from £66 to £244.
However, vehicles registered before April 5, 2024, will remain under the current tax rules.
### Infrastructure Investment
Significant investments in infrastructure include:
– £500 million for road maintenance starting April 2025
– Over £200 million will be invested in 2025/26 to improve EV charging infrastructure. This includes funding for local authorities to install on-street charging points across England, aiming to expand the existing network of over 70,000 public charging devices.
– Focus on underserved urban areas and motorways
– £120 million for electric van acquisition through plug-in vehicle grants
– Additional funding for wheelchair-accessible electric vehicles
BUSINESS SUPPORT AND INCENTIVES TAX ALLOWANCES
The government has extended several business-focused incentives:
– 100% First Year Allowances for EVs and charging points extended for another year
– Continued support for salary sacrifice schemes
– Additionally, over £2 billion in funding has been designated over five years to promote zero-emission vehicle production. The establishment of a National Wealth Fund is another stride toward investing in green technologies, including £2 billion for 11 new green hydrogen projects across the UK.
– Specific focus on zero-emission vehicle manufacturing and supply chains
LONG-TERM GOALS AND TARGETS
The government has reaffirmed its commitment to:
– Ending sales of new purely internal combustion engine vehicles by 2030
– Requiring all new cars and vans sold in the UK to be zero-emission by 2035
– Establishing Britain as a “clean energy superpower”
– Investing in green hydrogen projects and carbon capture storage
In term of the 2035 combustion ban, the precise wording was: “committed to phasing out new cars that rely solely on internal combustion engines by 2030 and that from 2035 all new cars and vans sold in the UK will be zero emission”.
The repercussions of these budgetary adjustments for drivers and businesses in the UK are significant. Here are the primary ways:
- Company Car Users: Those using company cars, especially PHEVs and double-cab pick-ups, will see their tax obligations increase. Employers will also face amplified NIC rates, altered based on vehicle type and emission levels.
- Owners of Conventional Vehicles: Although the freeze on fuel duty provides financial relief, increasing VED rates for higher-emission cars will raise vehicle costs. The higher ongoing operating expenses may incentivize consumers to shift towards EVs, aligning with the government’s electrification goals.
- Fleet and Automotive Industry: The emphasis on EV incentives and infrastructure development will bolster the market’s shift towards zero-emission vehicles. Businesses providing company cars must adapt, preparing fleets for electrification to manage rising costs while aligning up with sustainability targets.
- General Consumers: While extended incentives for EVs help maintain their appeal, potential buyers must navigate rising first-year VEDs and increasing purchase taxes based on vehicle emissions.
- Suppliers and Retailers: The auto industry might experience shifts in production focuses, with incentives pushing towards EVs rather than hybrids, affecting supply chains and manufacturing processes.
Despite these planned investments and adjustments, there is mixed reception among industry leaders and environmentalists.
Here are the complete quotes from industry leaders regarding the budget changes:
James Court, CEO of EVA England: “It is great to see the Chancellor backing electric vehicles in her Budget, with both an extension to the company car tax and changes to VED, as well as backing British industry with 2bn for manufacturing EVs. Additional funding for charge point infrastructure is also good news for current and future EV drivers as the UK continues to push forward the transition to a cleaner transport system.”
Ian Johnston, CEO, Osprey Charging Network: “It’s fantastic news that the government is maintaining tax benefits for working people who lease or buy electric cars, as these are vital to incentivising more consumers to drive electric and to continue the growth of ‘private driver’ EV sales. We look forward to seeing the government maintain a strong ZEV Mandate this autumn to allow the UK to truly realise the multi-billion pound opportunity the e-mobility sector can bring to the UK.”
Thom Groot, CEO of The Electric Car Scheme “Today’s announcement is a big vote of confidence in the pivotal role that salary sacrifice is having in driving EV uptake. The confirmed extension to low-BIK rates for zero-emission vehicles will make electric cars more attractive in the medium term and provides certainty in the short term for businesses looking to implement electric car schemes.”
Mike Hawes, CEO of SMMT: “The lack of substantive measures to support the new car market – in particular for electrified vehicles – is hugely disappointing. We welcome the extension of the Plug-in Van Grant and company car tax benefits, but these alone cannot drive the growth in demand needed. With the sector challenged to deliver the world’s most ambitious EV transition targets, achievement of those targets is in serious doubt. There must be an urgent review of the market and regulation, else the cost will soon be felt in reduced UK investment, economic growth and jobs.”
Paul Hollick, Chair of the Association of Fleet Professionals: “Tax increases were not as severe as anticipated and [this] clarity will support the electrification of car fleets.”
James Lett, Technical Editor at Autodata: “The benefits of salary sacrifice schemes in helping people lease new zero or low-emission vehicles cannot be underestimated. This scheme has successfully incentivised both private and fleet drivers to switch to electric vehicles by making them financially accessible for many – especially NHS staff, police forces, and local authorities.”
Richard Staveley, CEO of EO Charging: “There is a significant lack of support for businesses transitioning to electric vehicles, stressing the necessity for infrastructure investment.
Ian Hughes, CEO of Zenith: “Labour’s recognition of the need to review the expensive car supplement is welcome, though better support is needed to boost the used EV market.”
The Climate Group: “The decision to maintain the fuel duty freeze and not reduce VAT on EVs is a missed chance to further the UK’s zero-emission transport goals. More decisive actions are needed to promote widespread EV adoption.”
Vicky Read, CEO of ChargeUK: “While frustrating that the £950m Rapid Charging Fund (RCF) was not reconfirmed, we welcome the announcement of £200m of public funding for charge points, which we understand is in addition to the existing Local EV Infrastructure Fund. We look forward to discussing how to maximise the impact of that funding with the Government in due course. However, to really supercharge the UK’s transition to EVs and unlock its full economic potential, the Government needs to shore up the £6bn of private investment in charging and ensure that the switch to EVs is affordable for drivers.”
Om Shankar, General Manager of Konect: “The Budget is inadequate for accelerating infrastructure development, emphasizing the urgent requirement for a significant increase in public charging stations to meet future EV demand.”
The 2024 Autumn Budget from the UK government solidifies a strategic pivot towards electrification amidst an evol ving fiscal landscape for motor vehicles. With benefit-in-kind changes notably impacting PHEVs and fiscal shifts on the horizon for VED and company cars, strategic measures aim to drive the UK towards reaching its zero-emission objectives by 2035.
While the budget outlined plans for infrastructural upgrades and offered tax incentives for businesses, a need remains for comprehensive measures to address outright market gaps, especially in facilitating widespread EV adoption