The new Labour Government is considering a major shift in road taxation with a proposed pay-per-mile tax. The system would replace the current Vehicle Excise Duty (VED) with a charge based on distance travelled. It aims to address the shortfall in revenues that has accompanied the rise of electric vehicles (EVs). With the government facing financial pressure and seeking fairer ways to fund road maintenance, we’re going to look at what this tax will mean for UK drivers, its popularity (or lack of it) and its implications for the logistics sector.
What is pay-per-mile and why is it being considered?
The pay-per-mile tax system proposes charging drivers based on the distance they travel rather than a fixed annual fee. Currently, UK drivers pay a flat rate based on emissions and vehicle type. With the rise of electric vehicles, however, the resultant decrease in fuel duty revenue has left a Tesla-shaped hole in the public finances.
Prime Minister Keir Starmer and Chancellor Rachel Reeves have highlighted a £22 billion shortfall in the nation’s finances that needs to be addressed, with the pay-per-mile model aiming to have all road users contribute fairly to road maintenance, regardless of the vehicle they drive.
The system will probably involve using GPS or telematics to track mileage, with proposed charges ranging from 6p per mile to 15p per mile. While the pay-per-mile model may be intended to modernise taxation and alleviate congestion, it’s unlikely to bring a smile to everyone’s face.
Potential effect on drivers and the logistics industry
Needless to say, a pay-per-mile tax system would affect drivers in different ways. Urban drivers, who typically have shorter commutes and may use public transport more often, could see reduced costs under the system. However, rural drivers and those with longer commutes would face higher costs.
This tax shift will certainly be a financial pain for those who depend on driving for work, making them more susceptible.
The impact on the logistics industry
The proposed scheme would charge HGVs based on their road usage, with the intention of covering road repair costs and reducing the financial burden on taxpayers. As you might imagine, there’s major criticism within the logistics sector surrounding the proposal.
One of the main concerns is the scheme’s unfairness, particularly regarding foreign HGVs. Foreign operators don’t contribute to UK road maintenance despite using UK roads for international deliveries. The situation is seen as disadvantageous to British haulage companies, who may face higher costs without a corresponding increase in road quality. Additionally, there are worries about whether the additional charges would be passed on to consumers in the form of higher prices for goods.
The Road Haulage Association (RHA) argues that the new tax would impose an unfair financial burden on UK operators, potentially making them less competitive than international firms. This could result in a loss of contracts and a reduced market share for British companies.
Research from the Freight Transport Association suggests that HGVs already contribute sufficiently to road maintenance through existing taxes, so pay-per-mile is a contentious proposal, to say the least. The logistics sector is quite literally the driving force of the UK economy and taxing it for keeping the economy healthy seems counterproductive.
So what’s the public’s view on all this?
Public opinion on the proposed pay-per-mile road tax is notably divided. According to a recent YouGov survey of 2,000 UK adults, only 26% of drivers approve of the new model. Within this, support for the scheme is higher among older drivers (55+), with 33% in favour compared to just 19% of younger drivers (18-34). Proponents argue the system could be fairer, with 76% believing it would be a more equitable way to fund road maintenance. Additionally, 59% think it could help reduce unnecessary car use, congestion and emissions. Among supporters, 44% anticipate paying less tax under the new system, and 23% hope the additional revenue will fund infrastructure improvements.
In contrast, 53% of drivers are against the tax. Opposition is strongest among younger drivers (18-24), with 60% against the idea, compared to 48% of older drivers (55+). Major concerns include increased taxation (53%), perceived unfairness to those who drive more (52%) and system complexity (51%). There are also worries about inefficient enforcement (43%) and data privacy (30%).
The debate also touches on exemptions and discounts. 44% of respondents believe disabled drivers should be exempt or receive discounts, and 50% think that those in remote or rural areas should not be charged. In contrast, 26% believe no exemptions should be made at all.
Electric vehicle (EV) drivers are, of course, unimpressed with the new tax, with 54% opposed to it compared to 52% of petrol and 53% of diesel drivers. A significant 57% of EV drivers and 64% of hybrid drivers feel they should receive an exemption or discount.
Adding fuel duty to the equation
Recent discussions about the potential removal of the 5p per litre cut in fuel duty have raised further concerns from the logistics sector. The increase in fuel costs would likely drive up prices for everyday goods, impacting both businesses and consumers.
Fuel is a major expense for logistics companies, constituting about a third of their operating costs. For example, the weekly fuel bill for a 44-tonne diesel HGV is roughly £888, with £436 attributed to fuel duty. With the removal of this fuel duty cut hindering economic growth, Logistics UK has called for the extension of the current five-pence cut for another year, citing that a 1p increase in fuel duty could cost UK haulage businesses over £185 million annually.
David Wells OBE, Chief Executive of Logistics UK, notes that the sector operates on narrow profit margins of around 2.5%. With the sector grappling with rising wage costs, new vehicle prices and investments required for a net-zero future, any increase in costs is likely to be passed down the supply chain, leading to higher consumer prices.
The road less travelled
Although the proposed pay-per-mile tax has yet to make an official appearance, Adam Smith, chief of staff to former Chancellor Jeremy Hunt, confirmed that Treasury staff have been instructed to begin working on the road pricing scheme, indicating the proposal is being seriously considered.
Should the tax materialise, its impact on the logistics sector will depend on the specifics of implementation – and we’ll likely see concessions for logistics firms that reflect their central role in the UK economy, (at least, we hope we will). Either way, the tax is likely to be hugely unpopular. Charging people a tax per mile will mean fewer miles driven, making it harder for everyone from businesses to families to stay connected and on the go.
For more information, head to x2uk.com.