New vehicle taxes for EV leasing customers

Seven years after introducing the Expensive Car Supplement (ECS) for petrol and diesel cars costing over £40,000, the UK Government has recently announced that electric cars will also be subject to this charge starting from April 2025.

Taking this into consideration, Auto Trader, the UK’s largest automotive platform, has commented on this decision and provided an explanation on exactly how the ECS affects car leasing customers.

The expensive car supplement, also known as the ‘luxury car tax’ requires owners of new cars with a retail cost of over £40,000 to pay an additional £410 in Vehicle Excise Duty (VED) for the first five years of ownership. With the ECS first being introduced in 2017, it is unlikely that this additional tax has affected the number of ‘luxury’ cars sold. The new car market remains somewhat flat post Covid due to rising prices of cars. For instance, the prices of new cars have seen what some drivers might find a surprising number of new cars now eligible for the so called “expensive car supplement” with the average price of a new car in June 2024 amounting to £50,175 compared to £35,226 in June 2021, according to Auto Trader data.

However, this may be a different picture when the tax is implemented in seven months’ time for zero-emission vehicles. Considering the average price of a new electric car in the UK is £48,000, the ECS will affect a greater number of electric vehicle drivers compared to petrol and diesel car owners [1].

Will you be affected by ECS charges if you lease a new electric car?

Whilst the application of this tax to electric cars may stop some buyers from making the switch, it’s important to note that if you lease a car which has a retail price of over £40,000, including an electric car, after 31st March 2025, your tax will be incorporated into your monthly car payment if you have taken out a  Personal Contract Hire (PCH) or Business Contract Hire (BCH) lease.

By spreading the yearly tax across each month, this will mean that you will not have to make any additional one-off payments for this road tax, making the payments more manageable. Additionally, as the ECS charge will be incorporated into the price  advertised on the car leasing site customers will not need to arrange this themselves. It is important to note however that if you lease your car on a finance lease, or Personal Contract Purchase (PCP) agreement, the VED will only be incorporated in your monthly payments for the first year and thereafter you will be responsible for paying the VED.

Additionally, while you will also need to factor in the standard VED charge of £190 if you lease an electric car after 31st March next year, a discounted VED of £10 will be charged in the first year. Therefore, as VED payments are equally distributed over the duration of the leasing contract. While both the VED and ECS payments will be incorporated into the monthly lease payment, this monthly charge total will depend on the specific lease company

Erin Baker, Editorial Director at Auto Trader comments: “While it is unlikely that the additional luxury car tax has had much of an impact on people’s car purchase decisions since 2017, this may be about to change. With two thirds of all electric vehicles having a price point of over £40,000 this will make switching to a zero-emissions vehicle less appealing knowing that road taxes are higher, on top of the initial investment.

“However, for drivers that are looking at making the switch to an electric vehicle over the next few years and are concerned about not only the upfront cost as well as the newly implemented vehicle tax costs, car leasing is a good option to consider. Electric vehicles also offer attractive total cost ownerships benefits so they might actually be more economical than a petrol car.

“One of the benefits of leasing any vehicle from Auto Trader is that the VED, including the expensive car supplement, is incorporated into the monthly car payment cost if you take out a PCH or BCH lease, meaning that you don’t have to worry about sorting it out or having enough disposable cash to pay the annual cost in one sum. Furthermore, as the VED on a new electric vehicle is reduced for the first year, meaning that VED payments will on average still be lower than petrol and diesel cars.”