This week, the chancellor, Jeremy Hunt, announced a range of new tax hikes and spending cuts in the government’s Autumn Statement, several of which may impact on your car buying and driving decisions for years to come. So let’s look at it in detail.
Plenty has already been written and said in the media about how we’ve come to this point and why taxes will be going up so we don’t need to repeat that in detail. In summary, the last couple of decades of a global borrowing free-for-all has racked up enormous levels of household and government debt. Now the magic money tree has given all it can and we all have to start paying it back. The Autumn Statement is designed to do that, with several impacts for motorists.
The key areas of interest are:
- road tax (officially called vehicle excise duty, or VED) for electric vehicles
- benefit-in-kind for cars on company car schemes
- possible increases in fuel duty
- the effect of inflation and interest rates
EVs will start paying road tax from 2025
The headline news of the Autumn Statement, from the car industry’s point of view, is that EV owners will have to start paying road tax like everyone else from 2025 onwards. This is currently £165 a year, although it usually goes up each year. By the time this takes effect in 2025, it will probably be geting close to £200 a year.
The supplementary tax for new cars over £40,000 will also apply to new EVs for the first time, again starting in 2025.
What does this mean?
If you currently own an electric car (or buy one during 2023 or 2024), you don’t pay VED. You still have to renew your registration each year, but the charge is £0.
If you buy a new electric car from 2025 onwards, you will pay the designated first-year rate (currently £10) when you purchase the car and then the standard rate (currently £165) in subsequent years.
Basically, this will add about £14 a month to your running costs, based on the current VED rates.
However, there’s an additional sting. New cars over £40,000 pay more road tax in the their first five years – currently it’s an extra £355 a year – before reverting to the standard rate. And, as you have probably already noticed, the majority of new electric cars already sit above that threshold. As more new EVs are launched in coming years, that will add an extra £30 a month to a lot of car owners’ running costs from 2025 onwards.
Benefit-in-kind (BiK) is the tax you pay on a company car and forms an important part of salary sacrifice calculations. The government’s Autumn Statement has set out tax levels for BiK on new cars through until 2028. From 2025, this will start going up for almost all vehicles. The only exception will be the highest-polluting cars, which is because they are already at the highest tax threshold.
At the moment, BiK for an EV is 2% and it will stay that way until April 2025. After that, it will increase by 1% a year for three years – so up to 3% in 2025/26, 4% in 2026/27, and 5% in 2027/28.
For plug-in hybrid vehicles that produce less than 75g/km of CO2, there will also be a 1% BiK increase each year from three years from 2025 to 2028, which should end up with them paying 21% in BiK by 2028. All other vehicles, which already pay much more in BiK, will see a 1% increase for 2025/26 only.
What does this mean?
Again, these moves will see electric cars starting to shoulder more of the overall tax burden for the car industry. However, they will still maintain their considerable tax savings relative to equivalent petrol- or diesel-powered cars.
Salary sacrifice is an increasingly popular way for motorists to switch to an electric car thanks to substanially lower BiK taxation, and this will continue to be the case until 2028.
If you currently pay BiK on your car, nothing will change until 2025. In April 2025, your BiK contribution will go up by 1% on its current level. In April 2026, it may go up again if you have a plug-in hybrid or electric car. Same again in 2027.
Read more: How salary sacrifice makes EVs cheaper
Fuel duty confusion
There was considerable media disquiet after the Autumn Statement about fuel duty, with the suggestion that the chancellor had hidden a 12p/litre increase that is due to come into effect in March 2023. The answer is slightly more complicated.
Fuel duty is the tax you pay on every litre of petrol or diesel you buy. It is supposed to increase in March each year on a regular basis but, almost every year for more than a decade, the chancellor of the day has announced a 12-month freeze to keep it at the current level. When he was chancellor last Spring (about three chancellors ago), Rishi Sunak announced a temporary 5p reduction in fuel duty to help with the current cost-of-living crisis.
So while fuel duty is technically due to increase by 12p/litre in March, precedent suggests that it won’t happen (or at least, it will increase by a much smaller amount).
What does this mean?
We won’t know until February or March, but it’s entirely likely that the chancellor will announce either another freeze at the current level or a much smaller increase, depending on how things go over the next three months. Another discount seems highly unlikely.
Longer-term, it’s inevitable that fuel will get more expensive in coming years as part of a carrot/stick combination approach to shift the vast majority of new car buyers into electric cars. Get used to the idea of fuel prices being more than £2/litre, because it will probably happen sooner rather than later and it will be permanent.
Inflation and interest rates
As every single news outlet has covered extensively, inflation is running rampant across the UK and most of the world. The standard response to that is for central banks everywhere to start cranking up interest rates to make borrowing more expensive and slow down spending.
It is not in the chancellor’s power to set interest rates – that rests with the Bank of England – but the government’s economic policies will affect everyone’s borrowing and spending, which will affect inflation and therefore lead to the Bank of England adjusting interest rates in response.
Interest rates for new and used car finance have increased significantly over the last year, and that’s probably going to keep going for a while yet.
What does this mean?
Rates on car finance are fixed for the life of the agreement, so whatever you signed up to at the start of the agreement is what you’ll pay for the whole term. But it’s highly likely that your next car finance agreement will be more expensive than your current one.
Read more: What will higher interest rates mean for car finance customers?
Summary – what do we think overall?
It was inevitable that EV customers would have to start paying more tax eventually. This is simply a continuation of the incentives for EV buyers that have been progressively reduced for several years now as the cost of electric cars have steadily reduced to be closer to their petrol equivalents.
It is also inevitable and predicable that car industry figures complain whenever the government of the day dares to reduce subsidies or increase taxes on motorists – and most of the press releases that were fired into my inbox by PR companies within minutes of Jeremy Hunt’s Autumn Statement contained rants from various CEOs predicting doom, gloom and the death of electric cars in general. Funnily enough, they all have vested interests in the matter.
It’s also worth pointing that the same industry figures have said much the same thing every time previous governments have reduced subsidies for electric cars. And yet electric cars sales have continued growing, almost entirely unaffected by the elimination of thousand of pounds in subsidies for new EVs over the years.
Overall, it’s probably a fairly judged balance between the need to increase total taxation revenue without completely killing the tax advantages offered to electric cars.
One final point to remember is that most of these new tax increases will not take effect until 2025, which is after the next general election. The next government could completely change all of the above between now and then (and let’s face it, the current mob could easily u-turn on any of it by next week anyway…).
Car buying recommendations from The Car Expert
If you’re currently in the market for a new or used car, nothing has really changed as a result of the Autumn Statement that should make you reconsider the sort of car you are buying. The changes to road tax for EVs won’t take place until 2025, which is also when the rates for BiK will also gradually start to increase for most cars.
The only immediate effect of the Autumn Statement for car buyers is the possibility for interest rates to keep going up or come back down, and we’ll only see that in coming months once the other effects of the Statement are felt and the markets start to respond.
What you can be sure of is that the cost of buying and running a car is likely to keep getting more expensive over the next few years.
Cars will continue to get more expensive, especially as we all start switching to EVs. The cost premium for EVs over petrol cars is coming down, but that’s also because petrol cars are getting dearer as much as electric cars are getting cheaper.
Used car prices remain high but should start to ease during 2023. Good news if you’re selling a car, bad news if you’re buying one.
Energy prices (whether it’s petrol, diesel or electricity) will remain high and probably get higher. Interest rates may settle a bit, but will still be higher than their historic lows of the last decade. Insurance costs will continue creeping up. There will be ever-more taxes for cars to use cities, as London expands its ultra-low emission zone next year and other cities inevitably start to follow.
Last week, we concluded that the average monthly running cost for a petrol or diesel car in the UK is about £220, which is up more than 30% in four years. That figure is likely to keep rising, so make sure you are factoring plenty of breathing room into your budget when buying a new or used car.
We have plenty of tips, explanations and advice on every aspect of buying, financing, owning, running and selling a car here at The Car Expert. Before aking any big decisions, spend some time reading our various articles to help you make a better financial decision.