Government to dump 'Tesla Tax' on new electric cars introduced in April as industry warns it's stifling EV demand

By RAY MASSEY and ROB HULL

The Government is set to dump its controversial 'Tesla Tax' on new electric cars to help boost sluggish sales, a Labour minister has revealed in a leaked letter seen by MailOnline and This is Money.

The present £40,000 price-threshold above which buyers must pay hundreds of pounds more in tax is set to be raised or axed entirely for battery-powered vehicles at the next Budget 'to make it easier to buy electric cars,' writes Roads Minister Lilian Greenwood.

The controversial 'Expensive Car Supplement' - or ECS - has been levied on new petrol and diesel cars costing more than £40,000 since 2017.

However, to make the 'tax system fairer', the ECS has been applied also to new EVs sold after 1 April 2025 as part of a massive tax sting on motorists confirmed in the previous Budget.

But it has been blamed for stifling sales and increasing the risk of manufacturers failing to shift EVs in sufficient quantities to meet binding green car sales targets - and potentially trigger billions of pounds in fines as a result.

Motor industry figures have described the ECS and government's disjointed and unrealistic EV plans as 'bananas' and 'a fiasco'. 

The expensive car supplement for EVs - which has been dubbed a 'Tesla Tax' - was introduced on 1 April

The ECS is an additional premium tax on top of the standard rate of Vehicle Excise Duty (VED) levied on cars from the second year after they are registered.

Any car with a recommended retail price above £40,000 is stung by it. 

The £40,000 threshold introduced in 2017 has remained unchanged for eight years, despite a dramatic increase in new model prices since.

With EVs typically at a premium over their petrol and diesel counterparts, Auto Express recently estimated that the low price ceiling will hook seven in ten new electric cars sold in Britain in 2025.

The ECS is applied for five years in addition to the £195 VED standard rate - taking the total annual payout to £620 or £3,100 over the half-decade period it is enforced.

But Lilian Greenwood has suggested the Government is planning a major U-turn on the ECS on EVs. 

In response to a letter from Ben Maguire, the Lib Dem MP for North Cornwall, she wrote: 'As announced at Autumn Budget 2024, the Government recognises the disproportionate impact of the current VED Expensive Car Supplement threshold for those purchasing zero emission cars from 1 April 2025.

'We will consider raising the threshold for zero emission cars only at a future fiscal event to make it easier to buy electric cars.'

This revelation will irk car makers who have already responded to the application of the ECS to EVs by trimming the price of their electric car range so that they fall just below the £40k threshold.

Vauxhall and Fiat's performance spin-off Abarth have both reduced EV prices to sit under the ECS ceiling to make them more attractive to private buyers.

As such, they look set to lose thousands of pounds on each model sold at the reduced rate. 

Greenwood said in the letter: 'We will consider raising the threshold for zero emission cars only at a future fiscal event to make it easier to buy electric cars'

Robert Forrester, chief executive of leading top-six UK car dealer group Vertu, said: 'Retail customers were failing to buy EVs in the numbers needed'

Leading motor dealers said the proposed changes set out in the leaked document would be 'a move in the right direction' to help improve consumer confidence towards buying an EV, but that much more is needed to be done to stimulate a sluggish electric car market.

Current government policy could lead to 'rationing' of petrol car availability to inflate EV registrations to meet current 'unrealistic' sales targets, one of the biggest new car retailers warned.

Robert Forrester, chief executive of leading top-six UK car dealer group Vertu, which has 200 showrooms covering 34 major car brands, told us: 'It's a start. But it only takes us part of the way.'

He agreed the direction of travel towards increased electric car usage was correct, but that the 'unrealistic imposed targets' and timetable and 'pernicious penalties' for failing to meet them risked doing more harm than good.

'Retail customers were failing to buy EVs in the numbers needed to make a difference,' he said. 

'This is down to a variety of factors, including cost, lack of incentives, lack of a public charging infrastructure which was 'a mess'.

'People living in cities without their own driveway and being charged 85p per Kilowatt for public charging will not make the switch,' he said.

Auto Express previously estimated that seven in ten new electric vehicles sold in 2025 would be subject to the expensive car tax because most cost over £40,000 new

Vauxhall recently responded to the luxury tax by updating its price lists to ensure every one of its electric cars sits below he £40,000 threshold. Both the Grandland Ultimate and Astra ST Ultimate EVs have had their RRPs adjusted to £39,995

Abarth - the sporty Italian spin-off brand of Fiat - also slashed the price of one of its most expensive EVs to dodge the new luxury tax on electric cars

Forrester explained the Government would need to totally revise its Zero Emission Vehicle (ZEV) mandate setting out strict and ever-increasing targets for what proportion of cars sold each year must be electric.

Under the mandate, 22 per cent of new car sales last year had to be EVs - a target every mainstream maker reportedly achieved, according to Government officials. 

However, this year, the target has been ratcheted up to 28 per cent. In 2026, 33 per cent of all sales must be electric, rising to 80 per cent in 2030 and 100 per cent by 2035.

Mr Forrester said that even with recent tweaks to ease the requirements of the mandate, it remains 'an absolute fiasco'. 

He added: 'The targets will never be met. There's no chance of hitting 28 per cent this year.

'There's no doubt we will all be driving electric vehicles in the future. But the pace of change – the timetable - is unrealistic. This is just bananas. These targets are never going to be hit.'

He said that only 10 per cent of cars sold to retail customers were EVs. That compares to 30 per cent for company fleets.

The current strategy risked hurting both the Government's green ambitions and the UK car market, he said.

Following a review, the Government recently relaxed some of the rules around its electric car policy.

Although the 2030 ban on pure petrol and diesel cars remains in place, self-charging hybrid and plug-in hybrid cars will continue to be allowed until 2035. 

Manufacturers have also been give some 'flexibility' on hitting controversial ZEV Mandate targets, with penalties for failing to hit them reduced from £15,000 to £12,000.

Vertu noted bluntly: 'The appetite for electric cars is not yet sufficient to deliver the government's targets.'

Last year, of the 1.9million new cars delivered, 382,000 were electric. 

Based on a similar total volume of registrations, to meet this year's ZEV target would require 532,000 EVs to be sold.

'If last year's mix was repeated this year, the shortfall of 150,000 EVs would result in fines of £1.8billion,' the Vertu boss said.

The Society of Manufacturers and Traders (SMMT) has already revealed car firms selling EVs at a discounted loss – just to avoid fines – cost the industry more than £4.2billion.

In the leaked letter, Greenwood said: 'We are confident that our decisions [to retain the ZEV mandate] will protect jobs and give certainty for future investment. In areas such as charging infrastructure.

'There is no reduction in the government's ambition to decarbonise cars and vans.'

The Government has confirmed its binding ZEV mandate will remain in place demanding a rising share of electric car sales between now and 2035

Thousands of EV owners cheated Labour's April car tax sting for 12 months

According to new figures released by the DVLA this week, existing EV owners in the UK saved a potential £37.7million by renewing their VED before the Government's new car tax regulations came into effect on 1 April 2025.

As we suggested to existing electric car drivers back in February, by renewing their car tax for free before the end of March, they would be able to delay the £195 standard rate of VED due to be levied on their EVs from 1 April for an entire year.

And thousands did just that.

In response to a Freedom of Information request submitted by online car sales platform Cinch, the DVLA said tax was renewed for 244,598 electric cars across the UK in March.

This was a 1,467 per cent increase compared to the 15,614 renewals in the same month a year earlier.

Sam Sheehan, motoring editor at Cinch, said: 'Such a big increase in renewals shows just how many EV drivers might have got themselves another year of tax-free motoring, and who wouldn't want to save £195 if they had the chance?'