Chancellor Rachel Reeves with Prime Minister Keir Starmer . Credit: Simon Dawson / No 10 Downing Street
Amid political noise and warnings of possible turbulence in the bond market, a crucial announcement went largely unnoticed during last week’s Autumn Budget. The Government revealed a new tax that takes the UK into unfamiliar fiscal territory: a pay-per-mile system for electric and hybrid vehicles.
Although similar concepts have been floated before and a handful of smaller nations have trialled comparable models, the scheme introduced by Chancellor Rachel Reeves marks the first such tax in a major economy. The measure — designed to offset declining fuel duty revenues as electrification accelerates — is expected to be closely watched by governments around the world.
How the tax will work and how drivers will be monitored
From April 2028, electric vehicle owners will pay 3p per mile, while plug-in hybrid drivers will pay 1.5p per mile. Both rates will rise annually in line with inflation, according to Treasury documents.
Drivers will have their mileage checked once a year, typically during the MOT test, while new vehicles will have readings taken around their first and second registration anniversaries. The payment will be incorporated into the current Vehicle Excise Duty system run by the DVLA, with further regulation to be confirmed in the coming years.
Revenue expectations and the impact on household costs
The Office for Budget Responsibility estimates the scheme will raise £1.1 billion in 2028–29, increasing to £1.9 billion by 2030–31. This represents roughly half the fuel duty currently paid by petrol car drivers.
An electric vehicle travelling 8,500 miles in 2028–29 would incur around £255 in charges — still significantly below the tax burden for petrol or diesel drivers.
Concerns over contradictory policy signals
The announcement coincided with the extension of the 5p fuel duty cut until September next year, introduced to ease the pressure of high energy prices following Russia’s invasion of Ukraine.
However, the combination of incentivising fossil fuel consumption while taxing electric vehicles has sparked criticism. Analysts at the Centre for Economics and Business Research argue the measure conflicts with previous policies designed to encourage EV uptake.
Stricter UK targets and the tension of maintaining revenue
While the European Union debates delaying the 2035 ban on new combustion-engine vehicles, the UK remains committed to its more ambitious target: from 2030, all new cars must be electric or hybrid.
This latest fiscal step underscores the Government’s balancing act between cutting emissions and managing the loss of fuel-related revenue, a challenge all advanced economies will eventually face.
Grants extended but sales still expected to fall
To counter the expected fall in demand, the Government will extend EV purchase grants until 2029–30, offering up to £3,750 and funded with £300 million per year.
Even so, the OBR forecasts a reduction of 440,000 EV sales by 2030–31 due to the new measure. Although other incentives could boost sales by 320,000 units, the net loss of 120,000 vehicles — around 24,000 a year — remains notable.
A global test case for the future of road taxation
This year also marks the first time electric vehicles are subject to Vehicle Excise Duty, ending their long-standing exemption and signalling a broader shift in how road use will be taxed.
As the pay-per-mile model positions the UK at the forefront of the transition away from fossil-fuel taxation, it may well become a template — or a cautionary tale — for countries navigating the fiscal challenges of a fully electrified transport system.
