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Road Tax To Dive As Drivers Switch To Electric Vehicles

Road tax and fuel duties are currently worth in the region of 28 billion pounds to the UK government’s coffers. However, the plans to move all vehicles to electric could provide a severe hit to this revenue, based on the current tax model.

Declining tax revenueAt current prices, every litre of petrol or diesel that is sold on the forecourt brings the government 57.95 pence in revenue. Now when you factor in the additional cost of VAT (which is 20% wholesale price), that means 65% of your fuel cost goes directly to the government. If you change to an electric or hybrid car, that’s an immediate drop in tax revenue.

Electric cars do however require charging and so every pound you spend using the main grid to charge the vehicle brings the government 5p – clearly that’s a vastly smaller overall amount, and should you have solar panels or an alternative source, that could even drop to zero revenue!

It’s been suggested that the government might soon react to the increase in electric vehicle ownership to recoup the lost revenue. One could be to increase road tax on new and used cars regardless of their fuel type, while another could be to increase VAT on electricity, though that’s likely to be very unpopular with all consumers. Given that the government benefits more by the number of miles we drive, there could even be a form of “road pricing”, like road tolls whereby drivers are tracked and charged based on their mileage, which would apply to all vehicles and routes.

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Given the proposed 20% drop in revenue within three years, we may see such changes sooner rather than later. The government has committed to the UK banning sales on petrol and diesel vehicles within the next couple of decades, along with other changes including a ban on diesel cars in certain cities, more widespread charging zones and tighter controls on emissions. There’s already been a slight shift within the motor trade, with many manufacturers throwing vast resources into the development of electric or hybrid vehicles.

Issues do remain for many drivers which could be a possible factor in the speed of uptake, such as:

  • Driving distance before vehicle charging
  • Lack of charging points
  • Cost of a new electric car
  • Expensive replacement batteries
  • New vehicle insurance policy premiums

Without a significant change in the way that cars or fuel are taxed, estimates suggest the government might lose out on approximately 170 billion pounds within the next 10-15 years; it’s inevitable that this gap will be plugged somehow, and various options are still under investigation.

As the growth in electric cars progresses a fix will become increasingly urgent.