The Treasury has released a significant update regarding the future of car tax in the UK, specifically addressing how a new pay-per-mile system could work for drivers of electric and plug-in hybrid vehicles. The details were buried within the extensive Budget documents published after Chancellor Rachel Reeves's speech.
Opt-In Telematics and Privacy Guarantee
In its update, the government acknowledged that most electric vehicles (EVs) and plug-in hybrids (PHEVs) already have built-in telematics systems. These systems monitor various driving activities and data can be viewed by drivers, manufacturers, or approved third parties.
The Treasury made clear it will not force drivers to use this existing technology for administering the new Electric Vehicle Excise Duty (eVED). However, it is inviting views on how such technologies could be used on a strictly voluntary, opt-in basis in the future. The stated aim is to simplify the tax system and reduce paperwork for both private motorists and businesses.
Protecting driver privacy was highlighted as a top priority. The government stressed that any technology-based solutions considered would only ever be optional for vehicle owners.
How the New Mileage System Will Work
The proposed system will require drivers to provide an estimated mileage at the start of their Vehicle Excise Duty (VED) period. When that period ends, the driver must supply an actual mileage reading. The Driver and Vehicle Licensing Agency (DVLA) will then reconcile the two figures and calculate any balancing payment owed or credit due.
For those who underestimate their mileage, the DVLA plans to offer a facility to make a single balancing payment. Alternatively, drivers could spread the extra cost by adjusting their payments in the following tax year.
Motorists who overestimate their mileage will receive a credit. This credit can then be carried forward and offset against their tax liability in the next year. The DVLA is currently working on detailed plans for managing these under and overpayments, including how they will interact with enforcement procedures.
The Financial Impact on Electric Vehicle Owners
The move towards a distance-based tax system is partly driven by the changing landscape of motoring. As more drivers switch to electric vehicles, the Treasury faces a growing shortfall in revenue from traditional fuel duties and VED.
Recent Department for Transport (DfT) statistics reveal that battery electric cars, which have lower running costs than petrol models, are actually used more. On average, they clocked up around 8,900 miles in 2024.
If a pay-per-mile rate of 3p were applied, each electric car would generate approximately £267 in tax per year. With an estimated 1.4 million EVs currently on UK roads, this could translate to a total annual revenue of about £375 million for the Treasury. The update signals the government's careful steps towards implementing this major change in how drivers are taxed.
