Could we see the end of the £40k luxury car tax?
May 22, 2025 by Siobhan Doyle
Car changing is a big deal
Electric cars over £40,000 are still hit with the controversial luxury car tax. But is all that about to change?
The UK government is weighing up plans to raise the £40,000 threshold for the ‘luxury car tax’ – but only for zero-emission vehicles. The potential move, to be considered at a future fiscal event, is aimed at making electric cars more affordable, according to a letter, seen by Auto Express, from Labour’s Minister for the Future of Roads, Lilian Greenwood, to a local MP.
Greenwood was responding to concerns raised by Ben Maguire, MP for the ancient market town of Launceston in Cornwall, on behalf of a local dealership manager who warned that the Zero Emissions Vehicle (ZEV) mandate is harming sales.
In her response, Greenwood defended the government’s position, saying the outcome of the recent ZEV mandate consultation h ad “provided stability and certainty to British vehicle manufacturers” by reaffirming the 2030 ban on new petrol and diesel car sales.
She also pointed to potential changes to the Vehicle Excise Duty (VED) surcharge on electric cars over £40,000 – a charge introduced in April and widely criticised as a “luxury car tax” that deters EV adoption.
Currently, the Expensive Car Supplement (ECS) hits all vehicles – including electric ones from April 2025 – that cost over £40,000, adding an extra £425 annually in VED from the second to the sixth year of ownership. From year two, EV owners will pay the standard annual VED rate of £195 annually on top of this. Together, this adds up to £3,100 in tax over years two to six.
With the average electric car now priced well above £40,000 – around £10,000 more, according to estimates – critics argue that the luxury car tax undermines the government’s own ZEV mandate. This mandate oversees how manufacturers must meet sales targets for EVs in the run-up to 2030. Under the policy, 28% of new car sales must be electric this year, rising to 80% by 2030.
Yet in April, EVs made up just 20.4% of new registrations, below even last year’s 22% target, and only 10.7% of private car sales. This has fuelled calls for stronger incentives to get more drivers behind the wheel of an electric car.
The government recently tweaked the ZEV mandate, in consultation with manufacturers, to make the goals more achievable. It also confirmed that hybrid cars can remain on sale post-2030 – but the ECS threshold wasn’t among the changes.
Greenwood’s hint at a potential VED tax break for electric cars could unintentionally stall the EV market, as buyers wait to see if the so-called luxury car tax will be tweaked or scrapped.
Labour’s next fiscal event is the Autumn Budget, which is still months away. This is creating a window of uncertainty that could put off potential EV buyers. But now that the possible tax change is public, pressure is mounting on the government to act sooner and give buyers more clarity and confidence in buying an EV.
The industry has its say
Iain Reid, Head of Editorial at Carwow, has welcomed the news: “It’s very encouraging to see murmurs of the government reconsidering the VED surcharge for zero-emission vehicles priced over £40,000. Raising or removing this ‘luxury car tax’ threshold would provide vital support to manufacturers working to meet the government’s ZEV mandate, which requires 28% of new car sales to be zero-emission this year.
“Given the higher production costs of EVs, many models start above £40,000 new — making the current tax policy increasingly misaligned with the realities of the market. With ‘luxury car’ VED charges meaning paying £3,100 extra over six years, drivers are being unfairly penalised for choosing cleaner vehicles. This surcharge is also applied when the vehicle is resold, as it is based on its original list price, which means it can hit used EV buyers too.
“Clarity on this issue is urgently needed. Drivers and manufacturers alike need certainty to make long-term decisions — not to be left waiting on the next “fiscal event”. The government has a real opportunity to remove barriers, boost demand, and back a fair and practical transition to zero-emission transport.”
Car change? Carwow!
Looking for a new set of wheels? With Carwow you can sell your car quickly and for a fair price – as well as find great offers on your next one. Whether you’re looking to buy a car brand new, are after something used or you want to explore car leasing options, Carwow is your one stop shop for new car deals.
Click here to follow us on WhatsApp, where you can keep up-to-date with all the latest news, reviews, advice guides and videos.