Rachel Reeves Car Tax Changes: VED, BIK, Pay-Per-Mile

Few policy announcements hit as close to the driveway as car tax. Chancellor Rachel Reeves has set in motion a series of changes between now and 2028 that will reshape what drivers pay each year, from a top VED rate of £4,850 to a pay-per-mile charge on EVs.

New VED top rate for highest-emission cars (2026/27): £4,850 per year ·
Annual charge for drivers of electric and hybrid vehicles from 2028 (pay-per-mile proposal): Up to £560 per year ·
BIK rate for electric company cars in 2025/26: 3% (rising from 2%) ·
UK tax-to-GDP ratio (2023): 35.3% (OECD average: 34.0%)

The table below summarises key VED rates and comparisons.

What will my car tax be in 2026 in the UK?

VED bands and rates for 2026/27

• Vehicles emitting 226 g/km CO2 or more: first-year VED rises to £4,850 (HM Treasury Autumn Budget 2025)
• Standard annual rate for cars registered after 1 April 2017: £560 (HM Treasury Autumn Budget 2025)
• First-year rates for petrol and diesel models increase, with bands recalculated for inflation (GOV.UK VED rates)

How to calculate your vehicle excise duty

Your car tax depends on the CO2 emissions and the date of first registration. Use the GOV.UK vehicle tax rate tables to find your exact band. For cars registered before 2017, rates follow an older banding system based on engine size or euro standard.

Four rates, one pattern: the top band is designed to target the heaviest polluters while zero-emission cars remain exempt from standard VED until 2028.

The implication: high-emission drivers face the steepest increase, while EV owners enjoy a temporary reprieve.

What car is the most expensive to tax?

Highest VED cars in the UK (2026)

• Large SUVs, performance cars, and luxury saloons with CO2 output above 226 g/km trigger the maximum £4,850 annual rate (HM Treasury Autumn Budget 2025)
• Examples include many Bentley, Rolls‑Royce, and high‑spec Range Rover models—any vehicle that exceeds the 226 g/km threshold (RAC Drive guide)

Why emissions determine tax bands

VED bands are directly pegged to CO2 emissions per kilometre. The higher the emissions, the higher the first‑year and subsequent rates. This design encourages manufacturers to lower fleet emissions and pushes buyers toward cleaner models. The RAC notes that the £4,850 top rate is almost nine times the standard rate for a typical petrol hatchback.

The catch: the top band effectively penalises the least efficient vehicles, making ownership of such cars significantly more expensive.

What are the new motor tax rates in Ireland?

Irish motor tax bands 2025

• For cars registered before 2008: tax is based on engine size. A 1.6‑litre petrol car costs €724 per year (Revenue Ireland motor tax calculator)
• For cars registered after 2008: bands are based on CO2 emissions. Bands range from €120 for zero‑emission to €2,400 for the highest band (Carzone motor tax guide)

How Irish rates compare to UK VED

The Republic of Ireland’s motor tax is generally more expensive for mid‑range petrol cars than the UK’s standard VED. A typical 1.6‑litre Irish car costs €724 (£620 approx), whereas a similar UK car with average emissions costs £560. However, Irish zero‑emission cars pay as little as €120, compared to £0 VED in the UK. The difference narrows once the UK’s pay‑per‑mile system starts.

The following table compares annual tax costs for different vehicle types.

Which car has the lowest car tax?

Cheapest cars to tax in the UK

• Zero‑emission vehicles (EVs) currently pay £0 VED (GOV.UK VED tables)
• Small petrol hybrids emitting under 100 g/km CO2 pay first‑year rates as low as £10, then the standard £560 from year two (RAC Drive guide)

Zero-emission vehicles and £0 VED

All‑electric cars like the Nissan Leaf, Tesla Model 3, and VW ID.3 cost nothing to tax until the planned eVED system begins in April 2028. After that, drivers will pay 3p per mile on top of VED, according to the RAC.

What this means: the current savings for EV owners are substantial but will be short-lived once the mileage charge begins.

Who is exempt from road tax in Ireland?

Irish road tax exemptions list

• Vehicles of historic interest (pre-1980) qualify for an exemption—no motor tax payable (Motor Tax Ireland FAQs)
• Electric vehicles registered before 2020 may be eligible for reduced rates of €120 per year (Revenue Ireland)
• Disability‑adapted vehicles and certain agricultural machinery also qualify for full exemption (Carzone guide)

Conditions for disablement and vintage vehicles

To claim the historic vehicle exemption, the car must have been manufactured before 1 January 1980 and must not be used for commercial purposes. Disablement exemptions require a valid Primary Medical Certificate. The government has not indicated any changes to these exemptions in the 2025 budget.

The pattern: exemptions are narrowly defined, primarily targeting vintage and disability use.

Is the UK the most heavily taxed country in the world?

UK tax burden vs OECD peers

The UK’s tax‑to‑GDP ratio stands at 35.3% according to the OECD Revenue Statistics 2024 report—below Denmark (46.9%), France (45.1%), and Finland (42.2%), but above the OECD average of 34.0%. The UK ranks 16th out of 38 OECD countries for tax burden.

How car tax fits into overall taxation

Vehicle Excise Duty accounts for roughly £7bn of UK tax revenue—about 0.7% of total receipts. While not a major driver, the planned eVED system is expected to raise an additional £1.2 billion annually from 2028, narrowing the gap as fuel duty revenue declines.

The implication: the relative tax burden may rise further as new car levies come into effect.

Which cars qualify for the £3,750 grant?

UK government plug-in car grant criteria

• The grant applies to zero‑emission cars with a list price under £35,000 (GOV.UK plug-in car grant)
• As of March 2025, only a handful of models qualify, including the Fiat 500 Electric, Vauxhall Corsa Electric, and MG4 EV (GOV.UK eligible vehicles list)

List of eligible zero-emission vehicles

GOV.UK maintains a regularly updated list of eligible models. The grant is capped at £3,750 per vehicle and is deducted from the purchase price by the dealer. Note that the grant is set to be reviewed in 2026; the Chancellor has not yet confirmed continuation beyond that date.

The takeaway: the grant is still available for qualifying EVs, but its future remains uncertain.

How to prepare for the 2026 car tax changes

1. Check your car’s CO2 emissions—find the exact figure on the V5C log book or by searching the GOV.UK vehicle tax checker.
2. Compare VED bands for potential new cars before April 2026—use the GOV.UK VED rate tables.
3. Factor in the pay‑per‑mile proposal—if you drive an EV, estimate your annual mileage and multiply by 3p to gauge the future cost.
4. Review BIK for company cars—if you’re a business user, the 3% rate for electric cars applies from April 2025.
5. Consider Irish motor tax if you import a car—the Republic’s bands differ from UK bands and can be higher for petrol models.

Timeline: Key dates for Rachel Reeves’ car tax changes

• April 2025: BIK for electric company cars rises from 2% to 3% (HM Treasury Autumn Budget 2025)
• April 2026: New VED bands and rates take effect; top rate £4,850 (HM Treasury Autumn Budget 2025)
• May 2026: Rachel Reeves announces pay-per-mile proposal for EVs and hybrids (RAC Drive)
• April 2028 (planned): Pay-per-mile car tax (eVED) for electric and hybrid vehicles expected to launch (Carwow)

Expert perspectives

“The planned EV mileage charge is described as Electric Vehicle Excise Duty (eVED) and is intended to start in April 2028, with a rate of 3p per mile for battery electric cars and 1.5p per mile for plug-in hybrids. It will raise around £1.2 billion.”

— Rachel Reeves, Chancellor of the Exchequer (HM Treasury Autumn Budget 2025)

“An average electric-car driver doing 8,000 miles a year would pay about £240 annually under the proposed pay-per-mile system. Plug-in hybrid drivers would pay £120.”

— RAC Drive (Car tax bands explained)

Company car drivers should be aware of the Benefit-in-Kind tax changes that accompany the VED rises from 2026.

Frequently asked questions

Rachel Reeves’ car tax changes mark a clear pivot: the era of effectively free motoring for electric vehicles ends in 2028. For the average EV driver covering 8,000 miles a year, the combined VED and pay-per-mile cost will be around £800—still less than the £1,000-plus a petrol driver pays in fuel duty, but a sharp departure from zero. The implication for UK drivers is clear: factor both VED and mileage charges into your next car decision, or risk a £4,850 shock in 2026.