Four out of five electric company cars could be hit by an £850 ‘luxury tax’ levy from 1 April, pushing some models out of drivers’ budgets and hindering fleet uptake, leasing firm Alphabet has warned, while stressing that promised reforms are already overdue.

Changes to the vehicle excise duty (VED, or ‘road tax’) system were announced under the Conservative UK government more than two years ago, removing discounts for hybrids and exemptions for EVs. 

From 1 April 2025, all cars registered since April 2017 will pay the same annual rate (£195), plus an Expensive Car Supplement (£425) during the first five renewals if they’re priced at £40,000 or more. 

Although EV prices are falling – and many new models are tactically priced just below the threshold, while others such as the Abarth 500e have been discounted as such – they are still typically more expensive than their petrol, diesel or hybrid counterparts.

According to Alphabet GB’s consultancy and channel development manager, Caroline Sandall-Mansergh, 78% of the company’s EV order bank was priced over £40,000 during 2024. Their average list price of £57,500 compares with £51,500 across the board.

Cost implications for fleets, which account for most EV registrations, are significant. The expensive car supplement adds £850 to a three-year lease contract, while popular EVs such as the Hyundai Kona Electric could soon cost three times more to tax than their hybrid or petrol counterparts – on top of already pricier rentals.

Sandall-Mansergh said this increase could nudge EVs out of some drivers’ company car gradings, prompting them to stick with hybrid or combustion-engined vehicles. With pressure from higher vehicle pricing, rising interest rates and the recent slump in used values, fleets can’t easily adjust allowances to keep offering drivers that choice of powertrain. 

“Most [customers] are quite a long way down the road of transitioning to EVs and are entering the phase of the more challenging use cases," said Sandall-Mansergh. "It's [job-need] drivers doing high mileage [and] in quite cheap petrol or diesel cars where it is more challenging to find a suitable EV that's comparable on a total cost of ownership basis with the vehicles they're coming out of.”

Last year’s Autumn Budget included a promise to adjust that price threshold for EVs at a “future fiscal event” but the government has yet to offer any details. 

Sandall-Mansergh believes £60,000 is a more representative threshold for EVs and is calling for as much notice as possible so fleets can adapt. Reforms could be included in the Spring Budget, likely to be due in March, which is only a few weeks before the luxury tax levy comes into effect. 

In the meantime, Alphabet is working with customers to model the impact and identify where cheaper EVs or alternative schemes, such as salary sacrifice, can help to mitigate any resulting cost increases. 

“Most fleets have already done what they can within their whole-life cost model to try to absorb price increases," said Sandall-Mansergh. "We've maxed out the creative ways, because of everything that's happened over the past couple of years.

“This is putting a massive pressure on choice, and that only grows the longer we don't have certainty of where we're going to go next.”