The UK’s shift to electric vehicles (EVs) is accelerating, but it’s creating a major financial challenge for the Treasury.
With fewer petrol and diesel cars on the roads, the government faces an estimated £8 billion drop in fuel duty revenue by 2030.
This shortfall has put Chancellor Rachel Reeves under growing pressure to introduce new taxation measures, including a controversial pay-per-mile scheme.
Fuel duty currently contributes around £25 billion per year, making up roughly 2% of the UK’s total tax receipts. However, as EV adoption rises, fuel sales are expected to decline sharply.
According to a report by the Climate Change Committee (CCC), fuel duty revenue could drop by a third by 2030 if tax rates remain unchanged.
The issue is further complicated by the 15-year freeze on fuel duty, which has limited the government’s ability to raise revenue.
With the Labour Party’s pledge to ban new petrol and diesel car sales by 2030, the challenge of replacing lost income has become even more pressing.
One possible solution is a pay-per-mile tax, where drivers are charged based on distance travelled, regardless of whether they drive petrol, diesel, or electric vehicles.
This system is already in use in countries like Iceland and New Zealand, and some experts believe it could work in the UK.
Other options include higher vehicle excise duties or expanding carbon taxes, but these would need careful balancing to encourage greener transport without overburdening motorists.
The CCC’s report highlights a worrying gap in environmental taxation. In 2023, environmental taxes accounted for 5% of total UK tax receipts, with fuel duty making up 47% of that figure.
If fuel tax revenue collapses, the UK risks a serious funding crisis for transport and infrastructure projects.
While raising fuel duty could be a short-term fix, the long-term answer may lie in diversifying road taxes, such as road-user charging or an expanded emissions tax system.
The debate over road-user charging has already sparked political controversy. During the London mayoral election, Labour’s Sadiq Khan faced claims from Conservatives that he was planning to introduce a pay-per-mile charge for London drivers.
While Khan dismissed these claims as false, his book Breathe suggests he supports a more comprehensive road-charging system by the end of the decade.
The UK government faces a difficult balancing act—reducing carbon emissions while maintaining financial stability. With fuel duty revenue in decline, the pay-per-mile tax could soon become a reality.
However, any decision will need to carefully consider its impact on motorists, businesses, and the wider economy.
As the EV revolution continues, Rachel Reeves and the Treasury must act swiftly to ensure Britain’s tax system keeps pace with the transition to greener transport.
