Fraser of Allender takes another bite at the Budget

Yesterday, the Chancellor announced a new pay-per-mile tax for Battery Electric Vehicles (BEVs) and Plug-in Hybrids (PHEVs), set at £0.03 per mile for BEVs and £0.015 per mile for PHEVs with the aim of modernising Britain’s motoring tax systems as traditional fuel duty revenues continue to decline.

Historically, fuel has been the primary source of motoring tax revenue. But it has been frozen at 57.95 per litre from 2011 to 2022 and reduced to 52.95 pence per litre since 2022, leading to a real-terms decline in revenue.

Chart 1: UK vehicles by fuel type, 2014 Q3 to 2025 Q2

As BEVs (which pay no fuel duty) and PHEVs (which pay much less) gain market share, the Treasury faces a growing revenue gap. The new per-mile charge is designed to address the shortfall, by replicating the effect of fuel duty for vehicles which do not consume petrol or diesel.

Fuel Duty is already an indirect per-mile charge

Fuel duty works like a distance-based tax for petrol and diesel cars, albeit indirectly: the more you drive, the more fuel you consume, and the more duty you pay overall. However, this link is indirect because the volume of fuel consumer per mile depends on engine efficiency and vehicle weight.

This is crucial because the effective ‘per-mile’ rate of fuel duty is not consistent for all petrol and diesel cars, unlike the new BEV charge. Instead, the rate paid on a petrol or diesel car is mostly determined by its engine efficiency. A highly efficient car uses less fuel per mile, so its driver pays less duty for the same distance. Conversely, inefficient engines incur higher per-mile costs.

Table 1: Effective per mile rate by fuel type and engine size

Source: HMRC

Lighter cars with small engines (e.g. a Vauxhall Corsa) have an effective rate only slightly more than the flat £0.03 per mile to be levied on BEVs. Meanwhile heavy cars with large engines (e.g. a Land Rover Discovery) are much less fuel efficient, so these drivers will pay nearly triple the BEV rate. Engine efficiency is therefore central to cost comparisons.

Comparing effective per-mile rates

Table 2: Total and per-mile duty paid, by fuel type, at average annual mileage, 2023

Source: National Traffic Survey, Spiritmonitor

Table 2 shows the per-mile rate by fuel type and estimated total tax paid at the average annual mileage of a car in Great Britian, i.e., 7,100 miles.

Petrol cars pay the most per mile because they are generally less efficient than diesel cars. Whilst the flat rate on BEVs means they pay approximately half the average petrol rate, which is consistent with HM Treasury’s calculations behind the new BEV charge.

However, owners of petrol, diesel, and BEV cars should not expect to pay the total duties reported in table 2, due to differences in average mileage driven by fuel type.

Table 3: Total & per-mile duty paid, by each fuel type’s average annual mileage, 2023

Source: National Traffic Survey, Spiritmonitor

Despite having a lower ‘per mile’ rate, drivers of diesel cars pay more fuel duty in total than drivers of petrol cars overall because they drive much more each year. This is not surprising: diesel engines being more efficient means they are preferred by drivers with high annual mileage.

Notably, BEV drivers average the highest annual mileage (perhaps due to cheaper run costs, such as this one) of all three fuel types. This means the annual tax paid by the average BEV driver will be £267, not £213, and so quite a bit closer to the £386.50 paid by the average petrol driver.

Fairness of the tax

The proposed pay-per-mile charge raises important questions of fairness and is likely to be a source of public debate. On one hand, BEVs and PHEVs currently benefit from the road network – arguably to a greater extent given the former’s higher average annual mileage – while contributing significantly less to its upkeep than petrol and diesel vehicles (BEVs pay only Vehicle Excise Duty, which all vehicles pay).

On the other hand, many drivers purchased BEVs and PHEVs with the expectation of lower running costs, partly due to the absence of charges like fuel duty. Introducing this tax could therefore be perceived as undermining a principle that was central to encouraging BEV adoption. The delayed implementation until 2028 may ease some criticism, but contention is still likely.

There is also a concern around the fairness of the mileage charge for rural communities, for which travelling larger distances is much more commonplace and on whom the burden of taxation will be higher. Unlike in a petrol or diesel car, the flat charge per mile means there is also no possible mitigation by buying a more efficient car or driving more efficiently.

Rail fare freeze

For the first time in 30 years, rail fares in England will be frozen. This marks a departure from the long-standing, and controversial, practice of linking fare increases to the Retail Price Index (RPI), a discredited measure of inflation which is persistently higher than the Consumer Price Index (CPI), leading to above inflation increase in ticket prices.

The Treasury estimates the policy will cost around £150 million annually until 2029–30, funded through additional subsidies to Train Operating Companies. We expect that the Barnett consequentials in the Budget for Scotland include these (probably around the £10 million mark), even if a breakdown is still not yet available. The Scottish Government does not have to replicate the policy and can allocate funds according to its own priorities.

The UK Government’s approach is focused on easing cost-of-living pressures rather than pursuing transport-specific objectives, similar to the bus fare cap and fuel duty freeze. While fare freezes deliver short-term savings for passengers, they are costly and do not address service quality.

Historically, rising rail revenues have funded improvements in capacity and reliability, which has allowed Britian’s railways to recover from the decline in passenger numbers experienced under British Rail. By contrast, fare freezes require higher subsidies to maintain or cost cutting ‘behind the scenes.’

This creates a challenge for rail operators, particularly as they move towards renationalisation, and their budget must now compete with the Government’s other priorities, such as spending in other departments and managing cost-of-living pressures. If future budgets tighten and fares remain frozen, maintaining subsidies could come at the expense of service quality, potentially reducing ridership.

An alternative approach, as the Scottish Government has already implemented, is the abolition of peak fares. This may allow investing of the additional funding into electrification or new rolling stock to reduce operating costs and limit future fare increases without relying on expensive subsidies.

Alcohol duties increased with inflation

Alcohol duty is increasing by 4.5%, which is in line with the usual annual update based on the previous September’s RPI inflation figure. This has been criticised by the hospitality and drinks manufacturing industries, including Whisky producers.

Despite the higher duty rates, the OBR expect to collect less revenue each year. Alcohol sales are forecast to fall sharply this year and stay mostly flat later, driven by moderation trends, higher prices, and younger people drinking less. As a result, expected tax revenue is now about £2 billion lower per year than previously forecast by the decade, as shown in Chart 2.

Chart 3: Alcohol Duties, Outturn & Forecast, 2010-11 – 2030-31

Source OBR

Budget measures you may have missed” is published by Fraser of Allender.