The UK’s proposed pay-per-mile tax is set to transform the automotive landscape, but it may inadvertently hamper sales of internal combustion engine (ICE) vehicles. As the government shifts its focus to electric vehicles (EVs) through this new taxation scheme, a ripple effect could see traditional car sales falter in the wake of strict mandates and reduced consumer options.

Understanding the Pay-Per-Mile Tax

Announced in the Autumn Budget, the pay-per-mile tax is designed to replace declining fuel duty revenues as EV adoption accelerates. This tax will charge EV drivers based on distance traveled, starting at rates like 3 pence per mile under the Electric Vehicle Excise Duty (eVED). Initial payments will include a £10 setup fee followed by an annual charge of £195 for newer EVs registered after April 2025. While intended to promote fairness by taxing actual road usage, concerns are mounting among high-mileage drivers, particularly in car-dependent regions.

Impact on ICE Vehicle Sales

The pay-per-mile tax isn’t just a challenge for EV adoption; it could also stifle ICE vehicle sales due to the UK’s Zero-Emission Vehicle (ZEV) mandate. This regulation requires manufacturers to achieve increasing percentages of EV sales—28% by 2025, rising to 80% by 2030. If EV demand falls short, manufacturers face severe penalties of £15,000 per non-compliant vehicle sold, forcing them to limit ICE sales to avoid financial repercussions.

Forecasts and Consequences

According to the Office for Budget Responsibility (OBR), the new tax could reduce EV demand by 440,000 units between 2025 and 2031. Proposed offsets, including adjustments to the Electric Car Grant and an increase in the Expensive Car Supplement threshold from £40,000 to £50,000, are unlikely to fully compensate for this decline. While the OBR initially suggested these measures could offset 130,000 units, this was later revised to 320,000, highlighting the uncertainty surrounding these strategies.

A Feedback Loop of Market Restrictions

This situation creates a feedback loop where reduced EV demand directly restricts ICE vehicle options. As manufacturers struggle to meet ZEV requirements, they may raise the list prices of EVs to meet new thresholds, further alienating potential buyers. With fewer affordable ICE options available, consumers who prefer traditional combustion vehicles may find themselves with limited choices as the infrastructure transitions towards electrification.

Global Context and Comparisons

Pay-per-mile taxation isn’t unique to the UK. Similar systems have been implemented in places like Oregon and Utah, which utilize telematics for tracking mileage. As the US explores pilot programs amid declining fuel tax revenues due to EV growth, the UK’s plan mirrors these efforts while risking a significant barrier to EV adoption. By tying EV sales directly to ICE allowances, the government may inadvertently create a bottleneck in the market.

The stakes are high: the balance between promoting EV adoption and maintaining a viable ICE market is delicate. As the automotive industry evolves, the implications of the pay-per-mile tax will resonate across all vehicle segments.