Owners of emission-free vehicles to pay tax for the first time (2024)

Electric car owners will have to pay road tax for the first time, as part of ‘eye-watering’ Budget plans designed to fill a £54 billion hole in the public finances.

Chancellor Jeremy Hunt will use Thursday’s budget to change Treasury rules which mean emission-free cars and vans currently pay no vehicle excise duty.

The move is designed to plug a projected £7 billion shortfall in road tax as the switch to electric vehicles gathers pace.

But it is likely to prove controversial as it will act as a disincentive to motorists thinking of going green, at a time when soaring energy prices are already undermining the financial case for switching to electric.

Mr Hunt yesterday warned that the parlous state of the public finances meant he would have to take a series of ‘eye-watering’ decisions in next week’s Budget.

The Chancellor warned of a ‘tough road ahead’ for the UK as official figures showed the economy shrank by 0.2 per cent in the third quarter of this year.

The Bank of England warned last week that Britain could be entering a two-year recession, the longest on record.

Mr Hunt said that he will be working to make a possible recession ‘shallower and quicker’ in next week’s Budget.

Treasury sources said the Chancellor is expected to produce a huge billion package of tax rises and spending cuts designed to convince financial markets that the UK’s towering debts will begin to fall within five years.

A source said the ‘hole’ in the public finances is now estimated to be £54 billion.

But some Tory MPs fear that raising taxes and cutting spending will only hasten a recession.

Sir John Redwood said: ‘Treasury briefings say they need to clobber us with more taxes to cut demand. Meanwhile in the real world we worry about the approaching recession.

‘Why does the Treasury drive by looking in the rear view mirror instead of seeing they are steering us into a downturn?’

A former Tory Cabinet minister added: ‘The Chancellor is talking about filling in a hole while he’s still digging it. The more taxes he raises, the deeper it will be.’

Mr Hunt said the looming downturn was due largely to Vladimir Putin’s ‘weaponisation’ of gas supplies during his war in Ukraine.

Speaking in response to the grim new figures on the economy, he said: ‘I am under no illusion that there is a tough road ahead - one which will require extremely difficult decisions to restore confidence and economic stability.

‘But to achieve long-term sustainable growth, we need to grip inflation, balance the books and get debt falling. There is no other way.

‘While the world economy faces extreme turbulence, the fundamental resilience of the British economy is cause for optimism in the long run.’

He said the Bank’s prediction of a recession was ‘disappointing but not entirely unexpected news’, adding: ‘The best thing I can do as Chancellor is to produce a plan that brings down inflation, brings down the upward pressure on interest rates.

‘What we need is to put that plan in place, it’s not going to be easy, there are going to be some very difficult choices. I’ve used the word “eye-watering” before, and that’s the truth.’

The new tax on electric vehicles reflects mounting concern within the Treasury that the drive for net zero will rob the government of huge tax revenues paid by motorists.

Electric vehicles are exempt from both the annual £165 VED standard rate and the £335 ‘premium supplement’ levied on new cars costing more than £40,000.

Figures suggest there are almost 600,000 electric vehicles on the UK’s roads and they now account for one in six new cars sold. A further 430,000 plug-in hybrid cars also pay a reduced rate of road tax.

Studies have forecast that the switch could eventually cost the Treasury £7 billion in lost VED, along with a further £27 billion a year in fuel duty unless taxes are introduced to cover electric vehicles.

Treasury sources said there were no plans to introduce road pricing at this stage.

Next week’s package is expected to include up to £25 billion in extra taxes.

Much of the increase will be done through stealth taxes, such as freezing thresholds for income tax, National Insurance, inheritance tax and pension savings for six years, dragging millions more people into paying higher taxes.

Mr Hunt will also target the better off through increases in capital gains tax and dividend tax, which will hit investors and second home owners.

And the Chancellor will pencil in spending cuts totalling more than £30 billion, although the bulk are likely to be postponed until after the next election.

Ministers are still considering whether to end the decade-long cap on council tax rises, clearing the way for local authorities to hike bills in line with inflation.

A survey by the County Councils Network yesterday warned that almost four-fifths of local authorities fear they could go bust next year unless they get further financial support.

Labour’s shadow chancellor Rachel Reeves described yesterday’s growth figures as ‘another page of failure in the Tories’ record on growth’.