Four-in-five electric vehicles liable to £425 VED surcharge

The Government is being urged to change the threshold for a new tax on electric vehicles (EVs) due to take effect from April.

A surcharge on VED, the expensive car allowance also dubbed the luxury car tax was introduced in 2017, for all new, internal combustion engine (ICE) vehicles costing more than £40,000.

In 2022, the then Chancellor, Jeremy Hunt, announced it would also apply to EVs, including plug-in hybrids (PHEVs), from April 2025.

The £40,000 threshold includes optional extras and is based on the manufacturer’s official list price of the car, not the price actually paid by the customer.

It currently costs £410 and is paid annually for five years starting from the first standard VED payment that is made when the car is a year old.

It is set to rise to £425 from April, leaving fleets facing increased rentals and, in turn, impacting wholelife costs, crucial to making EVs an economical as well as a green choice.

Limited EV choice below £40,000

Alphabet is concerned the new tax on EVs will negatively impact adoption rates in the new car market, with just one-in-five zero-emission cars (19%) currently costing less than £40,000, according to new analysis.

Furthermore, with the tax impacting EVs up to six years old, it will have a detrimental effect on used car market, it says. 

“It will impact wholelife costs,” said Caroline Sandall-Mansergh, consultancy and channel development manager at Alphabet (GB). 

“It will impact anybody that is looking at the total cost of ownership of having an EV... it’s not an insubstantial amount.”

She told Fleet News: “We could see really important EVs start to fall out of grade and, because we still don’t have enough EVs at the cheaper end of the scale, you’re then putting immediate pressure on the more populous grades within fleets.

“The trouble is most companies are not going to be in a position to uplift grade allowances by £20 or £30 pounds a month, because everybody is in fairly sharp cost control measures.”

Alphabet data reveals that the average P11D value of quotable petrol, diesel, hybrid and EV models is £51,855 – just over 25% more than the current £40,000 threshold. 

However, if you look at the 961 quotable EV models, the average list price is £60,273, and for 81% of quotable EVs that are listed over £40,000, the average P11D equates to £66,041, leaving just 19% below that threshold

As a result, Sandall-Mansergh is calling on the Government to increase the threshold to £60,000 for EVs to better reflect the market.    

“I don’t believe the current threshold of £40,000 is at the right level,” she said. “Based on a review of Alphabet’s data relating to 3,508 quotable vehicle models, our view is that it should be raised to £60,000.” 

The figure should then be reviewed annually, based on P11D values of the nationwide vehicle parc, she says.

The price of EVs is becoming more competitive and cheaper models are starting to enter the market such as the Dacia Spring, with a P11D price below £17,000, and the all-new Renault 5 E-Tech starting at less than £23,000.    

“There will be cheaper EVs coming this year and next, and we will start to see more of a balance, and be in a position where we can directly compare all vehicles of all fuel and energy types,” said Sandall-Mansergh.

“But right now, we cannot do that. They are very, very different, and keeping it at £40,000 is harming the market at a time when we need as many measures to keep drawing people into EVs.”

The Government has acknowledged the new tax poses a problem for the EV market. 

In the Autumn Budget, the Government said it recognised the “disproportionate impact” of the expensive car supplement threshold for those purchasing zero emission cars and will consider raising the threshold for zero emission cars at a future fiscal event, to make it easier to buy electric cars.

With the Treasury due to give its spring forecast in March, Sandall-Mansergh would like the Government to change the threshold for EVs before April, saying it would be welcomed by the fleet and leasing industry and further assist the Government's green mandate. 

She added: “Any delay to moving the ECS (expensive car supplement) threshold is likely to increase drivers' hesitancy and potential reticence from making the switch to EV, because including EVs from 1 April will mean increased cost of ownership.”

Review car choice lists

In the meantime, she is urging fleet decision-makers to “utilise the support” of their fleet provider.

She explained: “We are the people that can run that wholelife cost modelling for you and help you to understand whether there are tweaks that you could make in the way that your grading structure works.

“There may be opportunities to make some changes, to recognise a more positive position and to try to provide a bit more protection. 

“But also working closely with providers in terms of looking at the vehicle mix that you are allowing, particularly if you are operating a restricted list.”

“Sometimes it could be really difficult to change your list, because of the people that need to sign it off,” she added. 

“Think about how you can translate that requirement for those stakeholders, to give you the power to be able to act and make changes really quickly, to take advantage of a situation or to react to something adverse that’s happened.”

She concluded: “Operators should be reviewing the way they construct their car choice list to try to make it as reflective as possible of actual cost.

“They need to ensure they’re taking a detailed and sophisticated enough view of every element to get accurate results.

“We know they can’t build a car list based on, for example, 25 different averages, but they must have something structured – and now more than ever it needs to be accurate.”