Electric Company Cars Face Potential £850 Luxury Tax Levy
Alphabet, a leasing firm, has issued a warning that four out of five electric company cars could be subject to an £850 ‘luxury tax’ levy starting from 1 April. This levy could push some models out of drivers’ budgets and hinder fleet uptake, highlighting the urgency for promised reforms that are currently overdue.
The changes to the vehicle excise duty (VED) system were announced by the UK government over two years ago, eliminating discounts for hybrids and exemptions for electric vehicles. Effective from 1 April 2025, all cars registered since April 2017 will be required to pay a standard annual rate of £195, along with an Expensive Car Supplement of £425 during the first five renewals if their value exceeds £40,000.
While the prices of electric vehicles are gradually decreasing and some models are strategically priced just below the threshold, they still tend to be more expensive than their petrol, diesel, or hybrid counterparts. According to Caroline Sandall-Mansergh, the consultancy and channel development manager at Alphabet GB, 78% of the company’s EV order bank in 2024 had a price tag exceeding £40,000, with an average list price of £57,500 compared to £51,500 across all vehicles.
For fleet operators, who represent a significant portion of EV registrations, the cost implications are substantial. The expensive car supplement could add £850 to a three-year lease contract, making popular EVs like the Hyundai Kona Electric significantly more expensive to tax compared to hybrid or petrol models, in addition to already higher rental costs.
The potential increase in costs may lead to some drivers opting for hybrid or combustion-engined vehicles over EVs, especially as fleets struggle to adjust allowances amidst higher vehicle pricing, rising interest rates, and declining used values. Sandall-Mansergh emphasized the challenges faced by drivers with high mileage requirements and cheaper petrol or diesel cars in finding an EV that is competitive in terms of total cost of ownership.
The Autumn Budget of the previous year included a commitment to revise the price threshold for EVs at a future fiscal event, but no details have been provided by the government thus far. Sandall-Mansergh suggests that £60,000 would be a more appropriate threshold for EVs and urges for early notification to allow fleets to adapt accordingly. Reforms may be announced in the upcoming Spring Budget, expected in March, just a few weeks before the luxury tax levy takes effect.
