Raise taxes on petrol and diesel cars ‘to reduce EV premium’, government urged

Ministers have been urged to consider increasing taxes on petrol and diesel cars to reduce the “premium” associated with electric vehicle (EV) purchases.

The Resolution Foundation, an economic think tank, suggested the move should be taken if “concerns” persist over the number of EVs being bought. The report from the think tank also called on the government to eliminate “arbitrary” tax breaks for EVs, arguing that they unfairly benefit higher-income drivers.

Benefit-in-kind incentives are limited to people whose employers provide company cars – which are often those earning larger wages – while salary sacrifice is pegged to an employee’s tax rate, meaning higher earners receive a bigger incentive.

The report stated: “The withdrawal of these tax incentives should be pre-announced, which would bring forward demand for EVs as motorists look to take advantage of them before they expire.

“If, though, sales concerns persist, then ministers should look to increase taxes on new non-electric cars to reduce the premium associated with purchasing a new EV, rather than subsidise EVs any more.”

The think tank also highlighted the need to address the higher cost of public charging for EVs compared to home charging, estimating that using kerbside chargers instead of home-installed ones could cost around £425 a year based on average mileage.

The report urges the government to reduce VAT on public electric vehicle charging from 20 per cent to 5 per cent, in line with home charging, and calls for actions to resolve supply issues and increase competition in public charging. It also advocates for discounted train and bus fares for benefit claimants or non-car owners, and for a more accurate reflection of carbon emissions in airline passenger fees.

Resolution Foundation principal economist Jonathan Marshall commented: “If the UK is to reach net zero by 2050, we need to decarbonise travel, and fast. That’s no easy task when it makes up a third of our carbon emissions. But the cash prize for doing so could be huge, with more than £20 billion of annual savings on the table by the mid-2030s.

The transition to electric vehicles promises to reduce costs to motorists. However, the risk is that without further policy changes, those savings could all go to richer households.

“But with universally affordable charging for electric vehicles, targeted discounts for public transport, and more comprehensive carbon pricing for those reluctant to ditch their frequent flights, a fair transition is very much within our reach.”

Steve Gooding, director of the RAC Foundation, said: “Tax incentives that favour wealthier households might stick in the craw, but it’s the wealthier motorists and fleet buyers who will ultimately drive the transition to electric motoring because they buy the new cars that ultimately cascade into the used – more affordable – market.

“More focus is clearly needed on the coverage, cost and reliability of public charging if the remaining consumer caution about EVs is to be overcome.”

Fiona Howarth, CEO of Octopus Electric Vehicles, said: “Drivers want electric cars, but the top reason not to buy one is cost. Electric car prices continue to fall, but until we have price parity with old school gas-guzzlers, salary sacrifice makes these tech-packed cars accessible to all.”

Quentin Willson, founder of FairCharge, said: “Abolishing salary sacrifice for EVs would be a grave mistake just as lower income drivers are beginning to understand the financial benefits.”