UK government creating “a tax haven” for large, luxury cars

New figures from the green transport group Transport & Environment (T&E) have found that the UK is ineffectively using its tax system and is failing to address the cost of the emissions, air pollution and safety concerns of large, luxury cars – especially when compared to the rest of Europe. This could make the UK “a tax haven” for polluting larger cars in the minds of car manufacturers who will continue to accelerate the trend towards more of them being on UK roads.

The figures come from T&E’s Good Tax Guide. T&E’s experts have analysed the tax systems of countries across the EU and the UK to see how those systems are being used to address the emissions of new vehicles as well as influencing the uptake of new BEVs.

T&E analysis shows that the gap in tax paid in the UK between battery electric SUVs and petrol SUVs ranks 24th out of 31 European countries. This is largely down to the UK’s comparatively low acquisition tax (first year Vehicle Excise Duty – VED), meaning high-polluting cars are taxed at a significantly lower rate than other European countries.

The average petrol compact SUV in the UK only pays £255. As a result, the difference in acquisition tax between battery electric and petrol SUVs ranks the UK down in 16th out of 23 countries with such a tax. A good example of the problem in practice is a medium-large sized SUV, like the BMW X5. Its acquisition tax in the UK is £1565, while in France, the same tax would amount to €60,000 (£51,415) – a considerable cost to factor in when considering a larger, more polluting vehicle.

The gap between the UK’s acquisition tax and other countries with similar acquisition tax systems is heightened further when looking at higher polluting cars, with other countries deploying a far more progressive approach to ensure that new car buyers are paying for the cost of the emissions their cars produce.

The result of the UK not taxing higher polluting cars enough is shown in new 2023 registration data. Cars with between 160gCO2/km and 199gCO2/km represented 9.3% of private registrations, while cars with over 200gCO2/km represented a further 6.1% of new registrations. Compare this to France, for example, where cars in the same categories only represent 0.7% of new car registrations. 

Meanwhile, the UK could be using its tax system to discourage the growth of new SUV sales, which recent T&E analysis found had grown by 23% between 2022 and 2023. 

The UK has shown some leadership with its tax system, however. Company car drivers in the UK are benefiting from a progressive tax system, otherwise known as the benefit-in-kind (BiK) system, which pushes them towards battery electric vehicles (BEV). This has led to corporate BEV registrations to soar from 1.6% in 2019 to 22.5% in 2023 with company car registrations now largely driving the majority of electric vehicle sales in the UK.

T&E says that the Government needs to replicate its leadership with benefit-in-kind by addressing the problems in the private car tax system. Levying higher taxes on the most polluting and heaviest new cars would not only be an equitable source of revenue by targeting wealthier car buyers, but it would widen the tax gap between battery electric and petrol cars, making the former a more attractive option. Revenue raised could also be used to help support the electric vehicle transition for middle and lower income groups. Instead the Government plans to introduce ownership tax (annual VED) for battery electric vehicles from 2025, which will only further narrow the tax differential between battery electric and petrol cars. 

T&E UK is calling for the Government to increase first year VED paid on the purchase of the most polluting cars; to introduce a new weight-based element to first year VED targeted at the heaviest new cars; and to provide certainty about long term plans for benefit-in-kind beyond 2027/28.

Ralph Palmer, UK Electric Vehicle and Fleets Officer at Transport & Environment, said:

“The UK Government is missing out on an equitable and easily actionable source of revenue by not targeting wealthy buyers of oversized, over-polluting SUVs. The result is that the UK risks becoming a tax haven for larger and more polluting cars, despite the harm they cause to the environment and other road users. Bringing the UK’s taxes on larger, luxury, more polluting cars more in line with other European countries will help make green alternatives more appealing to new car buyers.”

ENDS

Notes to editors:

• If you have any questions or would like to speak to Ralph Palmer please email alexander.killeen@transportenvironment.org or call 07806431577.