Is Pay-Per-Mile the future of road tax?

In response to significant changes in vehicle usage and the reducing tax receipts from VED and Fuel Duty, the UK government is considering alternative means of raising revenue, and a shift to a Pay-Per-Mile (PPM) system is a proposal that merits serious contemplation. The idea comes at a time when the growing prevalence of electric vehicles (EVs), which are currently exempt from VED and, of course, do not pay Fuel Duty.

The traditional road tax system in the UK, based largely on VED, is becoming increasingly unsustainable. VED, which is currently linked to a vehicle’s CO2 emissions, has been effective at encouraging a shift towards low-emission and zero-emission vehicles. However, as more drivers switch to electric vehicles, which are exempt from VED, there is a growing concern over how the government will recoup the billions of pounds that could be lost in road tax revenue.

According to a 2023 Transport Committee report, it’s estimated that by 2040, the shift to EVs could result in a revenue shortfall of £35 billion annually from lost VED and fuel duty. This fiscal gap makes it crucial for the government to explore alternative revenue-raising measures. A Pay-Per-Mile system offers a solution that aligns with both the rising popularity of EVs and the need for equitable road usage charges.

“It’s clear that the increasing uptake of electric vehicles is a positive step towards reducing emissions, but the government must ensure that we still have a fair and sustainable way of funding our roads,” said the Huw Merriman, MP, previous chair of the Parliamentary Transport Committee in a 2023 statement.

Photo by Sara Kurfeß on Unsplash

Under a Pay-Per-Mile scheme, drivers would pay a fee based on the distance they travel rather than a flat annual tax based on vehicle emissions. This means that those who drive more would pay more, while those who use their vehicles less frequently would benefit from lower costs. The aim is to create a more equitable system that takes into account the actual usage of roads.

There are several ways such a system could be implemented:

1. GPS-Based Tracking: Vehicles could be equipped with GPS technology that monitors the number of miles driven. This option is seen as one of the most accurate but could raise concerns over privacy and data security.
2. Annual Mileage Declarations: Drivers could report their mileage at regular intervals, potentially during MOTs or insurance renewals. This would require some level of self-reporting and verification but may be simpler and less invasive than GPS tracking. However, the potential for fraud could be high.
3. Toll-Based System: Another option is to levy charges on specific roads, such as motorways and major routes. This could operate similarly to the London Congestion Charge, where drivers are automatically billed when they enter certain zones.

Each method has its advantages and drawbacks, and it’s likely that any new system would need to balance precision, fairness, and practicality. The government could also explore differential pricing, where rates vary depending on vehicle type, emissions, or the time of day, incentivising the use of greener vehicles and off-peak travel.

The introduction of Pay-Per-Mile taxation is expected to have wide-ranging effects on UK drivers. One of the most immediate benefits would be that those who drive less will pay less, which could particularly benefit rural drivers who rely on vehicles for shorter trips. It could also encourage more sustainable driving behaviours, such as carpooling, reduced commuting, and the use of public transport, which would help in reducing congestion and emissions.

However, for drivers who depend heavily on their vehicles for work such as home carers and other community based workers, this could mean an increase in costs. This has raised concerns about the affordability of road use for those on lower incomes or living in areas with limited public transport options.

Nick Lyes. Image: IAM RoadSmart

“It’s crucial that any new system does not disproportionately impact those who have no viable alternative to car travel,” warned Nicholas Lyes, Head of Roads Policy at the RAC. “We need to ensure that essential travel remains affordable while encouraging sustainable practices.”

The Pay-Per-Mile proposal could also play a role in meeting the UK’s broader environmental goals. By charging drivers based on usage, the system could reduce unnecessary trips and lower overall emissions, helping the country progress towards its goal of net-zero emissions by 2050.

However, to avoid placing an undue burden on the public, any new system would need to be carefully managed. There have been suggestions of integrating PPM with incentives for using greener vehicles, offering tax breaks or exemptions for electric vehicles, or applying variable rates to promote off-peak travel.

As the UK transitions towards a more sustainable future, Pay-Per-Mile taxation is emerging as a potential solution to the revenue challenges posed by the rise of electric vehicles and the decline of fuel duty. While the system could offer a fairer, usage-based approach to road funding, it will require careful consideration to ensure it does not disproportionately affect certain groups of drivers.

With proper implementation, this change could benefit both the economy and the environment, ensuring that roads remain funded while encouraging a shift towards more sustainable transport.

“The pay-per-mile tax, which would see car owners pay extra depending on how much they drive, is rumoured to be on the upcoming budget agenda, pencilled in for October 30^th,” says Vytas Palovis, VP of Growth at Ovoko. “Though little is known about its mechanism, the pay-per-mile tax could inadvertently fuel a rise in odometer tampering. As drivers look for ways to minimise their road tax burden, some may resort to illegal methods, which can have serious safety and financial implications for car buyers.”

Author: Mark Salisbury, Editor, Fleetpoint