UK 2025 Budget

New UK budget brings EV tax, fuel duty freeze and extended Electric Car Grant

On November 26, UK chancellor of the exchequer Rachel Reeves presented the Treasury’s 2025 budget to the House of Commons. With this, she announced a number of measures that are set to impact the UK’s automotive industry in years to come.

James McLoughlin
James McLoughlin Assistant Editor
Published Modified
5 min
Rachel Reeves Budget 2025
UK chancellor Rachel Reeves delivered the 2025 budget statement on November 26 in the House of Commons

Following weeks of speculation and an early leak by the Office of Budget Responsibility (OBR), Reeves' budget statement confirmed the government’s economic priorities for the next 12 months and beyond.

It saw news of a freeze on national insurance and income tax thresholds, minimum wage rises and a range of other measures, many of which focused on the automotive industry. Here, Automotive Logistics explores some of the biggest announcements from the budget and how they could affect automotive supply chains in the UK.

Jump to:

Support for EV adoption

Much of the budget conversation relating to the automotive sector – perhaps unsurprisingly – revolved around the electrification of vehicles. This is a hot topic at the moment, with electrification a key priority for the UK government and OEMs alike.

In its ‘Modern Industrial Strategy’ unveiled earlier this year, the government outlined that, through its ‘Driving Research and Investment in Vehicle Electrification’ (Drive35) initiative, it would “ensure the UK remains at the forefront of zero-emission vehicle manufacturing”.

And in the 2025 budget, the government has acknowledged that “the UK’s transport sector is in a period of transformative change” and that the EV transition is key to meeting the UK’s net zero goals.

But many in the industry, including president of the Society of Motor Manufacturers and Traders (SMMT) president Mike Flanagan speaking at the SMMT Annual Dinner ahead of the budget announcement, have expressed concern over a misalignment between consumer willingness to adopt EVs and the level of electrification investment already built into OEM strategies.

In an attempt to address this issue, the government announced in the 2025 budget that it would extend the Electric Car Grant launched in July this year, which it claims has already helped over 35,000 drivers to make the switch to an EV by giving up to £3,750 off eligible EV models.

In August, 13 models from OEMs including Nissan, Renault and Vauxhall were declared eligible for the scheme after Chinese manufacturers such as BYD, Leapmotor, MG and Great Wall Motors have all offered discounts to offset the grant.

Now, the government has said it will provide an additional £1.3 billion of funding to support the scheme, which will be extended until 2029-30 in an effort to “support more consumers to switch”.

It also announced an additional £100m investment in EV charging infrastructure, building on the £400m of funding announced at Spending Review 2025. This funding is set to support the installation of more chargepoints homes and workplaces in the UK.

Furthermore,  the government has said it will extend funding for the Drive35 programme, allocating a further £1.5 billion to 2035 and taking total funding to £4 billion over the next 10 years. This, it said, will "support the development of UK capability in next-generation, zero-emission technology, ensuring the UK remains globally competitive".

What this could mean for automotive supply chains

The extension of the Electric Car Grant is likely to provide OEMs with greater short-term demand visibility, helping stabilise production schedules after a volatile period of EV ordering patterns. A clearer incentive structure for private buyers should support more predictable outbound flows, smoothing inventory cycles and reducing the risk of stock build-up at plants and ports. However, with the scheme focused on smaller, budget-friendly models, OEMs may need to adjust which models they focus on and ensure their supply chains can adapt to different battery options.

For tier suppliers, the commitment of £1.3 billion in additional grant funding could reinforce medium-term volume expectations. This will help justify ongoing investment in localisation, especially in components exposed to Rules of Origin requirements. Although, any acceleration in EV uptake will also intensify pressure on already stretched upstream supply chains for critical minerals and semiconductors, requiring suppliers to strengthen risk management and diversify sourcing strategies.

The additional investment in charging infrastructure will also affect the wider logistics network. More home and workplace chargepoints could help ease range anxiety, encouraging more people to buy EVs. That would increase the number of vehicles moving through processing centres, storage compounds and transport carriers. At the same time, installing all this new infrastructure will generate additional freight movements for equipment, cabling and construction materials. This could open new opportunities for logistics companies, from managing installation projects to delivering charging hardware and handling sensitive electrical components.

Overall, the announcements add some welcome demand-side clarity, but they also underline the need for supply chains to remain agile. EV adoption supported by government incentives may accelerate unevenly across regions, requiring OEMs, suppliers and logistics partners to continue refining network designs and capacity planning.

New EV and hybrid vehicle “pay-per-mile” tax

However, the 2025 budget has also promised reforms to motoring taxation that may remove one of the current incentives for EV adoption. From April 2028, drivers of electric and plug-in hybrid cars, previously exempt from fuel duty, will pay a mileage charge.

This, according to the government, is because the OBR has forecast a decline in fuel duty receipts to around £12 billion in the 2030s – representing half of the almost £25 billion collected in 2024.

It noted that “all vehicles contribute to congestion and wear-and-tear on the roads, but drivers of petrol and diesel vehicles pay fuel duty at the pump to contribute their fair share, whereas drivers of electric vehicles do not currently pay an equivalent”.

To ensure that switching to EVs is still an attractive choice for consumers, the tax paid by EV drivers is expected to be around half the fuel duty rate paid by the average petrol or diesel driver, with a reduced rate for plug-in hybrid drivers.

What this could mean for automotive supply chains

The introduction of a pay-per-mile tax for EVs and plug-in hybrids could have mixed consequences for automotive supply chains. While the reduced rate should help keep EVs competitively attractive, any perception that running costs are rising may soften demand growth, particularly in the private buyer market. For OEMs, this could complicate long-term production planning if consumers choose to keep older vehicles for longer or lean towards hybrid models instead of fully electric ones. Production lines may need to remain flexible enough to respond to shifts between powertrain types, potentially affecting battery sourcing, module assembly and inbound logistics flows.

Tier suppliers could also feel the impact. A slower or more uneven uptake of EVs would influence investment decisions around battery components, e-drive systems and thermal management technologies. Suppliers may need to plan for a more gradual ramp-up in EV-related volumes while maintaining support for hybrid and efficient combustion technologies. This balancing act could increase complexity across procurement, capacity planning and workforce allocation.

For logistics providers, a more cautious EV market could mean that growth in EV-related transport volumes remains steady rather than rapid. However, the continued presence of hybrids and a broader mix of powertrains will maintain the need for diverse handling capabilities in processing centres and during both inbound and outbound transport. If motorists delay replacing older petrol and diesel vehicles, logistics firms may also see extended demand for traditional parts distribution, servicing flows and aftermarket support.

Overall, although the pay-per-mile tax introduces an extra variable into the EV adoption curve, its lower rate should still support a long-term shift towards electrification. But for now, OEMs, suppliers and logistics operators will need to stay ready for a more gradual and potentially uneven transition.

Fuel duty freeze

Another measure announced in the 2025 budget was the extension of the 5p fuel duty cut until the end of August 2026. This cut was introduced by the government in March 2022 to help drivers cope with sharply rising petrol and diesel prices following global supply disruption and the war in Ukraine.

Originally intended to last just one year, the cut has been extended in every budget since. The government has said that rates will gradually return to March 2022 levels by March 2027. It also said it would scrap the planned increase in line with inflation for 2026-27.

What this could mean for automotive supply chains

For OEMs, the fuel duty freeze is unlikely to trigger major shifts in production strategy, but it may help keep demand for petrol and diesel vehicles steadier for a little longer. Lower running costs could encourage some consumers to delay the switch to an EV, especially in cost-sensitive segments. This may lead to a more gradual change in the range of vehicles being built, requiring OEMs to maintain flexibility across ICE, hybrid and EV production as demand fluctuates.

Tier suppliers may also see a modest effect. A slower decline in ICE vehicle use could sustain near-term demand for components such as exhaust systems, fuel delivery parts and engine management technologies. At the same time, suppliers already investing heavily in electrification will still need to plan for the long-term shift to EVs, balancing legacy production with newer programmes. This dual-track approach could add complexity to capacity planning and tooling decisions over the next couple of years.

For logistics service providers, the extension of the fuel duty cut offers some direct relief by keeping operating costs lower than they otherwise would be. This may help stabilise rates for vehicle transport, inbound parts deliveries and aftermarket distribution. If more drivers hold on to older ICE vehicles for longer, logistics companies could also see consistent demand for parts deliveries into dealer networks and service centres. While not transformative, the measure provides a degree of cost certainty in an environment where fuel remains one of the sector’s most significant expenses.

Overall, the fuel duty freeze is a supportive but relatively incremental measure for the automotive sector. It offers cost stability for logistics operators and may subtly influence consumer behaviour, but it does not meaningfully alter long-term supply chain planning, which remains anchored to the transition towards electrification.

Industry reaction to the budget

Issuing a statement in response to the budget, SMMT Chief Executive Mike Hawes said: “Government has recognised the automotive industry as a pillar of national strategic importance, backing it with an industrial strategy and additional £1.5 billion to drive competitiveness and investment.”

Hawes also welcomed measures such as the extension of the Electric Car Grant, support for charging infrastructure and deferring the end of employee car ownership schemes into the next parliament.

However, Hawes was keen to emphasise that while these measures will support the automotive industry in the UK, to his mind they “will not offset the impact of introducing a new electric vehicle excise duty” – something he has described as “the wrong measure at the wrong time”.

Hawes concluded: “Manufacturers have invested to bring more than 150 EV models to market. However, the pressure to deliver the world’s most ambitious zero emission vehicle sales targets – whilst maintaining industry viability – is intense. With even the OBR warning this new tax will undermine demand, government must work with industry to reduce the cost of compliance and protect the UK’s investment appeal.”

The president of the AA, Edmund King, said that he believes drivers are at “a fork in the road” following the budget announcement. “Drivers fully understand that the government needs to get the balance right between raising cash for roads investment, whilst ensuring it doesn't slow down the transition to electric cars in order to meet environmental targets,” he elaborated.

Meanwhile the Road Haulage Association (RHA), welcomed the decision to continue the freeze on fuel duty, but said the decision to reverse it after 2026 and increase rates in line with inflation from April 2027 will be “a hammer blow for many small businesses”.

The RHA also expressed support for the governments decision to allocate further funding to the construction of the Lower Thames Crossing and the government’s commitment to spend £2 billion annually for local authorities to repair potholes on their roads by 2029-30, as well as planning reforms which it has said will “help the essential infrastructure HGV, coach and van businesses rely on to get built more quickly”.

Adrian Fielden-Gray, COO of EV charge point operator Be.EV, questioned if the chancellor’s approach is fully up to date with “the realities of Britain’s national infrastructure and urgent energy transition needs”.

“Tilting the scales back in favour of fossil fuel vehicles by adding extra costs on top of EV usage runs against the grain of both the progress we have made on road electrification and the destination that we need to be driving for,” he said.

The managing director of Ford UK, Lisa Brankin, also weighed in on the matter, telling BBC News that now is “certainly not the right time” to implement new charges on EV usage. She warned that this measure “in the face of really fragile demand for electric vehicles, is just another brake”.

uk electric vehicles europe ev and battery ford must read oems policy and regulation smmt analysis budget tier suppliers

EventsView more