Labour made a well-publicised manifesto pledge not to increase income tax, National Insurance or VAT for working people. But with a significant funding gap, other measures such as wealth or sector-specific taxes, capital gains reform or tackling tax avoidance may be needed to fund public services and meet fiscal rules.

The National Institute of Economic and Social Research recently warned that taxes must rise if the Chancellor is to meet her self-imposed borrowing rules. Few ‘gimmes’ are expected this autumn. The challenge lies in balancing the tax pledge with the government’s clean energy mission. Delivering on the latter will require targeted fiscal incentives to drive investment and accelerate the energy transition.

Fiscal impact of Zero Emission Vehicle (ZEV) mandate

The fuel for electric vehicles (EVs) attracts no duty, aside from the 5% VAT on electricity for domestic charging (which is significantly less than the 52.95p per litre plus 20% VAT). With the ban on new petrol and diesel cars by 2030 approaching, the switch to EVs will require major tax reform to avoid a significant budget shortfall and encourage people to ditch petrol and diesel.

The UK is still falling short of the 2025 ZEV mandate, which requires 28% of new car sales to be zero-emission. While SMMT’s September data shows rising EV uptake, considerable manufacturers’ discounts are the primary driver of sales, raising concerns about the public’s desire for sustainability. New incentives are needed to boost adoption. But with limited funds for grants and rising borrowing costs, a time-limited tax break could encourage consumers to switch sooner.

Some changes may feature in the Budget, but bold, innovative measures are unlikely. The most probable move is a fuel duty increase, hinted at in the Chancellor’s 2024 statement. A replacement for Vehicle Excise Duty (VED) is also possible. So which options are really on the cards? We explore them below.

Fuel duty increase

One of the few surprises in 2024’s Autumn Budget was the continued freeze on fuel duty, costing the Treasury an estimated £3bn last year. An increase would align with the government’s pledge to phase out new petrol and diesel vehicles and meet its clean energy ambitions. But it also risks much criticism for exacerbating the cost-of-living crisis, which was cited as the reason for retaining the freeze last year.

Changes to fuel duties are needed to address the declining tax revenues that comes with the move away from petrol and diesel. While this may be met with hostility, given the current lower fuel prices, the Autumn Budget could be an opportune time to introduce an increase. As well as this, the Office for Budget Responsibility’s (OBR) March 2025 forecast included an assumption of the reversal of the 5p fuel duty cut and future RPI linked increases, expected to raise £2.7bn next year. It is conceivable that an unpopular middle ground is announced, involving the removal of the 5p cut but a continued freeze on duty.

Alternative to VED

Despite the government’s net zero ambitions, a price-per-mile tax for high-polluting vehicles was ruled out in 2024. A reversal remains possible, but if not, it raises the question of what other measures might be introduced. Recent policy shifts suggest a move away from incentivising low-carbon transport. For example, electric vans became subject to the congestion charge from January, having previously been exempt. From April 2025, electric and low-emission cars must also pay VED and the expensive car supplement. The OBR expects bringing EVs within the remit of VED will raise £9.1bn this year – three times the cost of the 2024 fuel duty freeze.

This year, more vehicles have been brought into scope for road tax. The upcoming Budget may introduce higher rates for more polluting vehicles, with diesel cars likely to be hit hardest due to their nitrogen oxide emissions. Other options could include expanding toll roads, congestion charges or clean air zones.

Super deduction for EV infrastructure qualifying investment

In the 2024 Autumn Budget the government pledged £200m for EV charging infrastructure. With fuel duties falling and no replacement scheme in place, it remains unclear how further investment will be funded. The transport secretary has acknowledged that poor access to charging is a major barrier to EV adoption, especially for those without off-street parking. The zero-emission mandate does little to address this.

While £200m is a start, it falls significantly short of the estimated £6bn investment cited by ChargeUK in late 2023. And when compared to other countries, the UK’s promised investment appears insufficient and could jeopardise the 2030 phase-out target. The funding also appears misdirected, with too much focus on slow 7kW/11kW chargers rather than the high-speed 150kW+ units drivers need for confidence and convenience. Local authorities should be encouraged to prioritise these faster chargers.

To stimulate private investment, a super deduction for EV infrastructure could be reintroduced. The previous framework remains in place and could be adapted to incentivise development of the national charging network, helping to bridge the funding gap with minimal impact on the public purse.

Tax incentive for individuals purchasing a new EV

A time-limited tax incentive could accelerate EV adoption, which currently lags behind government targets. With grants off the table due to budget constraints, a temporary VAT exemption on EVs could accelerate consumer uptake.

Level public and home charging costs for EVs

Around 40% of homes lack driveways, making residents reliant on public charge points, which are more expensive and less convenient. This is a major barrier to EV adoption. With the VAT rate on electricity at 5% for home charging but 20% for public charging, removing this disparity could support the shift away from petrol and diesel vehicles.

Will the 2025 Autumn Budget address falling EPL revenues?

The energy transition is not going to happen overnight. Oil and gas will be a part of the energy transition, but its use will slowly taper as it gets replaced with renewable energy sources.

During the transition, the choice is not whether or not we use fossil fuels – it will be whether we produce them ourselves or import them. The increase to the rate of the Energy Profits Levy (EPL) a year ago has meant that we have become increasingly reliant on energy imports and seen oil producers exit the North Sea.

It is not a question of turning off fossil fuels and this is magically replaced by renewable energy sources. Oil and gas will be a part of the energy transition, in that we will slowly taper down our fossil fuel usage and this will be replaced by greener energy sources. While we are making the transition, we are going to use the oil and gas anyway. It is just a choice as to whether we produce it ourselves or we import it and energy imports are on a upward trajectory. With the fiscal disincentive for North Sea oil and gas production, we are already seeing the capital being reinvested elsewhere in the world.

The trade body Offshore Energy UK (OEUK) released a report earlier this month claiming that replacing the EPL with a profits-based mechanism could increase investment and output in the North Sea. The proposal would be levied against excess profits triggered by unusually high prices. With oil, gas and renewable energy needed to meet our energy needs, a reform of the EPL would be welcome butthis is considered remote.

If the Autumn Budget does not include an overhaul to the North Sea oil and gas regime, it’s highly likely that EPL revenues will continue to fall. History shows that raising tax rates leads to a fall in absolute tax take, which the EPL data supports. Since the increase in the rate of EPL over a year ago, the projected receipts are not in line actuals, casting doubt on the assertion of a £1.2bn per annum uplift in windfall tax revenues – a sum the government had earmarked to fund GB Energy.

Tax incentives that support net zero

Introducing tax incentives is another way in which the government could look to drive the net zero transition while encouraging economic growth.

Super deduction within the Freeports

The introduction of full expensing had the unintended consequence of diluting Freeports’ competitive edge, which previously offered accelerated capital allowances to attract investment. To restore this advantage, a targeted super deduction for qualifying spend within Freeport zones could be reintroduced. This would provide a clear tax incentive for businesses to locate in Freeport zones.

Tax reduction on carbon reducing processes

Dating back to William Pitt the Younger, the UK’s income-based taxation system could be considered outdated and not aligned with net zero ambitions. While a full-scale overhaul is unlikely, taxing carbon rather than income could better reflect public sentiment and environmental goals.

A radical option would be a carbon added tax, applied at each stage of production involving carbon emissions, similar to VAT. However, this is improbable in the short term.

A more realistic, though still unlikely, approach would be to reward carbon-reducing behaviours through tax credits. Examples include corporate power purchase agreements for renewable energy, homeowners installing solar panels and EV charging during off-peak hours. Incentivising these actions could help shift behaviour without the need for sweeping reform.

Short-term Autumn Budget fixes vs long-term green growth

With public finances under pressure, the upcoming Budget is likely to focus on revenue-raising measures such as new taxes and freezing personal allowances. While this may replenish government coffers, it risks dampening growth, particularly in green infrastructure investment, which remains urgently needed.

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If you would like to discuss the impact for your energy and natural resources business, please contact Sheena McGuinness or your usual RSM contact.

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