Rachel Reeves is considering a pay-per-mile tax on electric vehicles (EVs) as part of her upcoming budget, a move that could raise hundreds of millions of pounds a year and help offset the sharp fall in fuel tax revenue caused by Britain’s switch to greener forms of transport.
The proposed levy, expected to be included in the November 26 Budget, would see electric vehicle drivers pay around 3p per mile, increasing running costs by an average of £250 a year. The new tax would apply alongside existing road taxes, which electric vehicle owners will be liable for from April this year.
A government spokesman said the move was aimed at making car taxation “fairer for all motorists”, pointing out that petrol and diesel drivers currently pay around £600 a year in fuel tax, while electric vehicle owners pay none. “The fuel tax applies to petrol and diesel, but there is no equivalent for electric vehicles. We want a fairer system for all drivers,” the spokesman said.
The proposed pay-per-mile fee is seen as part of the Chancellor’s efforts to close a £20 billion to £30 billion budget gap with the rest of Parliament. According to the Daily Telegraph, which first reported the plan, the system will be introduced in 2028 following a public consultation.
According to the Society of Motor Manufacturers and Traders (SMMT), around four million Brits are expected to be driving electric cars or vans by then. However, the trade body warned that the measure could undermine the UK’s fragile transition to electric vehicles.
“We recognize the need for a new approach to vehicle taxes,” the SMMT said, “but at such a crucial moment in the UK’s transition to electric vehicles, this would be completely the wrong measure at the wrong time.”
Jon Lawes, managing director of Novuna Vehicle Solutions, said that while a fairer tax system was inevitable, affordability and infrastructure should be a priority. “The cost of electric vehicles and the availability of charging options remain major barriers,” he said, calling on the government to accelerate the deployment of chargers, extend subsidies and increase incentives for used electric vehicles.
The government has already invested £4 billion to support the transition to electric vehicles, including grants worth up to £3,750 per vehicle. But the Chancellor faces growing pressure to expand the tax base as fuel tax revenue falls. Analysts estimate the Treasury could lose more than £25 billion a year by the early 2030s as the internal combustion engine fleet shrinks.
Policy analysts say the pay-per-mile system would represent a significant shift in transportation taxation, replacing fuel-based charges with usage-based fees. Both the Campaign for Better Transport and the Tony Blair Institute have called for a road tax in recent years, suggesting a charge of 1p per mile for cars and vans and up to 4p for heavy goods vehicles.
Even with a 3p charge, analysis by the Energy and Climate Intelligence Unit suggests that electric vehicles would be around £1,000 cheaper to run per year than petrol vehicles.
“This announcement comes shortly after the government weakened its electric vehicle sales targets amid pressure from industry,” said Colin Walker, head of the unit’s transport division. “This could result in more hybrid vehicles hitting the road that use five times more fuel than advertised, costing drivers hundreds more each year.”
Treasury insiders have portrayed the proposal as a matter of fairness rather than raising revenue, but its timing – as Labor prepares a tax-heavy second Budget – underlines the government’s growing dilemma: how to finance Britain’s transition to net zero without hindering the public uptake of clean technologies.
As Reeves finalizes her budget, the electric vehicle tax debate will test Labor’s ability to balance fiscal discipline, industrial policy and environmental ambitions – a triad that could set the new government’s economic tone.
