Lesson One: How to quickly undermine an entire market ... introduce a 'pay-per-mile' for EV vehicles

"Don't go from incentivising something and pushing it with legislation to start to put on penalties and tax on top of a positive development."

Hakan Samuelsson, Chief Executive, Volvo Cars

Whilst that sentence makes perfect sense to most people,

Labour ministers may say they want you to buy an electric vehicle (EV), but if they really meant it, they wouldn’t be planning a major new tax on EV use while the market is still finding its feet.

Back in July, Heidi Alexander, the Transport Secretary, pledged to make EVs “cheaper for those who do want to make the switch,” and announced an EV grant of up to £3,750 for qualifying vehicles. Yet just four months later and the Treasury, under Rachel Reeves, is understood to be considering introducing a pay-per-mile tax of approximately 3p per mile for EVs, from around 2028.

The 3p tariff would align with the annual vehicle excise duty (VED) payment, with EV owners asked to estimate the number of miles they will drive in the year ahead.

This is not a minor adjustment. At an average annual mileage, this could translate into around £250 extra per year for EV drivers (compared to about £600 in fuel duty for the average owner of a diesel or petrol engine) . With upfront EV costs already high and infrastructure gaps still significant, that added burden sends the wrong signal to both consumers and manufacturers.

Mixed messages for the EV market

• On one hand we have incentives: purchase grants, targets for zero-emission vehicle (ZEV) mandates, promises of charging infrastructure. On the other, the government is signalling a new tax regime for exactly the vehicles it’s trying to promote.

• Industry reaction has been swift: the Society of Motor Manufacturers and Traders (SMMT) has warned that a pay-per-mile tax is “entirely the wrong measure at the wrong time” and could deter both consumers and investment.

• The tax is aimed at plugging a fiscal gap: the shift to EVs is depleting fuel duty revenues, which reached almost £25 billion in 2024-25 and are projected to decline further.

This is a classic case of policy incoherence, encouraging a transition while simultaneously introducing a disincentive, just as the infrastructure and market are still developing. And is another recent example of introducing policies that negatively impact upon wider net zero/climate strategy.

What other countries are doing (and what the UK could learn)

Some jurisdictions are exploring distance-based charges (Vehicle Miles Travelled or VMT) to replace fuel taxes: for example, Iceland has implemented an OBD/odometer-based tax for EVs and hybrids. In the Netherlands a “Pay by Use” odometer-based system is planned for 2030.

But crucially: in these cases, the shift is part of a strategic, long-run transition with clarity and signalling well ahead of time. The UK’s proposal risks being a surprise surprise, not part of an integrated roadmap.

Why the timing and structure matter...and why the UK’s approach is fraught

"As we've seen in other countries, introducing a charge now would stifle the growth we've seen over the past years, and be self-defeating".

James Court, Head of Policy, Octopus Electric Vehicles

Here are some of the other issues that are likely to further stifle growth:

• Consumer confidence: Buyers considering EVs are often sensitive to total cost of ownership. Adding a mileage tax just as EV uptake tries to accelerate could push some back into petrol/diesel or hybrids.

• Industry investment: Auto-makers and chargers need predictable policy frameworks. A looming tax disrupts investment decisions and undermines the UK’s attractiveness as a EV manufacturing base.

• Equity issues: A flat 3p per mile tax does not discriminate by context: rural drivers, fleet users, low-mileage urban residents could all be hit unfairly.

• Infrastructure gap: Many places still struggle with access to reliable charging. Penalising EV mileage when infrastructure is incomplete undermines the transition.

• Mixed signals: If you incentivise EV purchase, then later add a per-mile tax, you create confusion and resentment. People may ask: why bother switching now if the cost-benefit is eroding?

Will it work? Not likely in the current form

Yes, the government has a fiscal challenge as fuel duty revenues drop. But this policy feels like a tax grab, not a transition-enabler. It lacks clarity, fairness and alignment with the broader net zero strategy. It is a sign of narrow-sighted desperation.

Unless the mileage tax is embedded within a broader framework, including incentives, exemptions, differential pricing (e.g., for low-income, rural, fleet users) and a transparent roadmap, it risks doing more harm than good. Simply slapping 3p per mile on EVs without addressing infrastructure, upfront cost, charger access and consumer sentiment is likely to stall EV growth, not support it.

What the government should do instead

• Announce the tax framework now, not in 2028: clarity ahead of time helps markets adapt.

• Introduce the tax alongside supportive measures: e.g., enhanced incentives, tariff reductions, charger rollout guarantees.

• Ensure fairness and context differentiation: rural drivers, low-mileage households, fleets should not be penalised disproportionately.

• Align the tax reform with national EV targets: if the UK remains committed to zero emission vehicle mandates, the tax should enhance, not undermine, that goal.

• Make it part of a strategic communication: show how per-mile tax is balanced by subsidies, infrastructure investment, and long-term savings for EV users.

Conclusion

The UK is at a crucial moment in its EV transition, it is slowly getting there in terms of sales and needs a lot more time to develop a second-hand market for EVs. But the government is sending contradictory messages: “Switch to EVs for the planet and your wallet”, and “Now we’ll tax you by the mile.” That dichotomy risks undermining years of investment, innovation and public persuasion, the EV industry is openly criticising this move and at present the very idea comes across as yet another money grabbing exercise, as opposed to a wider, strategic aim.

If the UK wants to lead the world in electrification, it must offer policy certainty, not policy whiplash. Introducing a pay-per-mile tax for EVs might be fiscally reasonable, but it needs to be executed as part of a coherent strategy. Otherwise, it will become just another confusing tax, another barrier, and the very people it needs to buy in will look elsewhere. This move feels like the wrong time.