A new roadmap for vehicle tax could earn the Treasury £64bn while ensuring the biggest polluters pay

The UK’s current vehicle tax system is failing to keep pace with the shift to electric, and risks making it harder for motorists to choose cleaner cars.

The Treasury faces a projected £50 billion loss in fuel duty revenues by 2035–36 and a further £8 billion in 1st year VED. The Government must replace this lost revenue. But it must do so without weakening the financial case for going electric.

With the planned introduction of the Electric Vehicle Excise Duty (eVED) in 2028, a private buyer choosing a new petrol car could pay around £1,000 less in upfront taxes over 10 years than someone buying a comparable battery electric vehicle (BEV). The UK already ranks 25th out of 30 European countries for tax incentives to switch to electric and is expected to fall to last place once eVED is introduced.

“BEV drivers will soon be paying more upfront tax than petrol and diesel drivers, exactly the wrong signal as the UK needs to accelerate the shift to electric. T&E is calling for targeted tax reforms that raise revenue, restore fairness and speed up the transition. Our proposals could generate an extra £64 billion for the Treasury by 2035 while keeping vehicle tax revenues above 2026 levels, giving ministers a stable revenue base, protecting incentives to go electric and making the transition accessible to households across the country.” Eloise Sacares, T&E Vehicles Policy Senior Researcher said.

First, ministers should reform first-year VED by 2027 so that plug-in hybrids (PHEVs) are taxed according to their real-world emissions. Currently, PHEVs are charged according to their test emissions - which underestimate PHEV emissions by almost six times. A Toyota C-HR plug-in hybrid, for example, is recorded at 19g of CO₂ per kilometre in testing but emits 105g in real-world driving - resulting in a popular PHEV SUV being undertaxed by almost £300. Further, under the planned 2028 eVED rates, PHEVs would pay just 1.5p per mile, compared with 3p for BEVs.

Together, this means that a PHEV compact SUV would pay around £1,095 less in upfront taxes over 10 years than an equivalent BEV. Correcting the PHEV 1st-year VED loophole could raise £1.4 billion for the Treasury by 2035 and ensure a clear incentive for consumers to go fully electric. Meanwhile, increasing eVED rates for PHEVs to 5p per mile would raise an additional £3.4bn by 2035.

The Government should also introduce a 10% first-year VED escalator from 2028. This would strengthen the tax advantage for battery electric vehicles over petrol, diesel and plug-in hybrid models, while raising an estimated £741 million by 2035.

Ministers should introduce a Large Vehicle Levy from 2027, ensuring that oversized SUVs make a fairer contribution to the costs they impose on roads and society. A charge of £10 per kilogram for vehicle weight above 1,600kg, with a 400kg allowance for electric batteries, could raise around £2 billion a year.

The Government should also reverse the 5p fuel duty cut in 2027 and introduce a 5% fuel duty escalator from 2028. This could raise an additional £44 billion by 2035, with the greatest impact falling on higher-income households that are more likely to own larger vehicles and use more fuel.

‘Finally, the proceeds should help fund a social leasing scheme, giving lower-income households access to affordable electric vehicles. T&E estimates that this could support social leasing for between 1.1 million and 4.6 million households. Reliable, cleaner cars should not be a privilege reserved for higher earners.’’ Eloise Sacares added.

With the transition to electric vehicles gathering pace, now is the time where the Government can support this, while also ensuring motorists continue to pay their fair share.

Download and read our full road tax report 'Era of Electrification'