EV tax to drive up price of new petrol cars

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Rachel Reeves’s tax raid on electric vehicles is poised to push up the price of petrol and diesel cars as manufacturers ration them in order to meet net zero targets.

One of Britain’s biggest dealership chains warned of “turmoil” in the industry after the Chancellor announced a new 3p pay-per-mile tax on electric cars, making them less attractive to buyers.

Experts said that fewer people were likely to buy electric vehicles as a result – creating problems for the car industry, which is required to sell more of them in order to hit legally binding net zero targets.

As a result, carmakers are expected to put up the prices of petrol and diesel models and limit their sales, in order to nudge buyers towards purchasing an electric one instead.

Robert Forrester, the chief executive of Vertu Motors, said he expected overall sales to fall in the coming years even as dealers are forced to implement deep discounts on electric vehicles (EV) in order to meet mandated quotas.

He said carmakers had already been forced into rationing sales of petrol and hybrid vehicles to avoid hefty net zero fines, adding that the new per-mile fee on electric vehicles would exacerbate the problem.

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Mr Forrester said: “Before the Budget, the industry was already facing a very significant challenge to hit the ZEV [zero-emission vehicles] mandate targets. So the problem all along has been that you get into a rationing situation and, in a rationing situation, petrol and diesel car prices go up – they have to.”

The warning was echoed by the Institute for Fiscal Studies (IFS), which said companies would be forced to inflate petrol and diesel car prices in order to boost electric vehicle sales.

Under the ZEV mandate, companies must ensure 33pc of the cars they sell are electric this year or risk massive fines. The figure is up from 28pc in 2025 and 22pc in 2024 and will gradually rise to 100pc by 2035.

But with the average EV still significantly more expensive than an equivalent petrol car, manufacturers have been resorting to price cuts to ensure they shift enough vehicles.

Isaac Delestre, at the IFS, said: “What that means is the share of electric cars sold as a share of total cars can’t fall. What that means, then, is that insofar as this policy does reduce demand for electric cars – the market will have to adjust in order to keep those shares of electric cars sold constant.

“So pretty counter-intuitively you could see a tax on electric cars which ultimately will end up increasing the price of petrol and diesel vehicles.”

Under the pay-per-mile tax announced in Wednesday’s Budget, motorists will need to estimate their annual mileage and pay the 3p-per-mile fee at the same time they pay their annual road tax.

The charge, which will come into force in 2028, is expected to cost the average electric vehicle (EV) driver £255 a year for driving 8,500 miles.

Mr Forrester said: “The pay-per-mile tax makes that problem even more serious, because mature manufacturers selling a mix of ICE cars and EVs now face an almost impossible challenge.

“So it’s completely obvious there’s going to be big turmoil and probably a reduction in volume as a consequence, because pay-per-mile undoubtedly puts another concern in the minds of consumers and businesses.”

The Office for Budget Responsibility (OBR) expects the new per-mile tax to reduce electric vehicle sales by 440,000 across the rest of the decade, although this will be partly offset by EV grants designed to boost sales.

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

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

But Mr Forrester insisted manufacturers were unlikely to be able to reduce EV prices further.

He said: “They’re already losing money. And so what we need and what will now have to happen is the Government will have to revisit the ZEV targets, and the headline targets will have to move down.”

He warned Britain was also at risk of “going on a completely different path” to the rest of Europe, with the European Union currently weighing whether to relax its own vehicle emission targets.

The Government was contacted for comment.

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