Budget 2025: Pay-per-mile Ev Road Tax Confirmed To Include Phevs

The UK government’s new pay-per-mile tax on electric cars will also include plug-in hybrid cars.

The news was revealed within documents released in error by the Office for Budget Responsibility (OBR) ahead of today’s budget.

Those documents also confirmed a plan by the government to end the 5p freeze on fuel duty, which will therefore increase for the first time since 2010.

Pay-per-mile to hit EV and PHEV drivers

The new pay-per-mile tax is being brough in as part of an effort to claw back lost revenue from the duty imposed on petrol and diesel as motorists transition away from ICE vehicles.

The levy is set at 3p per mile driven in an EV and 1.5p per mile driven in a PHEV. This will come into effect from April 2028.

The OBR forecasts The Treasury will thereby raise £1.1 billion in the 2028-29 tax year, raising to £1.9bn by 2030-31.

However, “the new charge is likely to reduce demand for electric cars, as it increases their lifetime cost”, said the OBR.

It also forecasts that the new tax will preclude some 440,000 EV sales between now and March 2031.

This will be ameliorated, however, by 130,000 of increased sales as a result of the government's Electric Car Grant, which was announced this July. 

The OBR warned that the decrease in demand resulting from the new road tax will make it harder for car makers to satisfy the government’s ZEV mandate. This requires an EV sales mix of 28% this year, rising to 80% by 2030. 

As such, it notes that “to meet the mandate, manufacturers would therefore need to respond through lowering prices or reducing sales of non-EV vehicles”.

5p fuel duty freeze to end

Fuel duty will increase for the first time since 2010, as the government has announced that it will end the 5p freeze next year.

The current rate of 52.95p per litre was set in 2022 by then chancellor Rishi Sunak in an effort to lower high fuel prices exacerbated by the war in Ukraine. 

The policy is reviewed each March. The documents released by the OBR on Wednesday detailed that the government will continue the freeze will continue for “a further five months”, but from September 2026 it will be reversed as part of a three-stage approach. 

This is expected to take place each financial year, with the levy confirmed to be uprated in line with the Retail Price Index (RPI).

This is expected to ultimately raise fuel duty to at least 57.95p per litre – the rate that has been in place since April 2010 – although the government has yet to confirm. 

The Office for Budget Responsibility (OBR) said that, in the 2025-26 financial year, fuel duty at its current rate will raise £24 billion (0.8% of GDP), a 1.6% decrease from 2024-25.

With the freeze removed, it forecasts an increase of £0.2bn (1%) in 2026-27, peaking at £26bn in 2028-29. It predicts that this will then fall by £0.9bn by 2030-31 as EV sales rise.

The OBR said, without the rise, there was a “fiscal risk from declining fuel duty revenues due to the transition to electric vehicles”. 

It predicts the 0.7% share of GDP that fuel duty today contributes will fall to a 0.1% share by 2050-51, when “more than 90% of cars on the road are projected to be fully electric”. 

This is a breaking news story. More updates will follow.