What is a ‘pay-per-mile’ system and how could it work in the UK?

An MP has criticised rumours that the government is considering introducing a pay-per-kilometre scheme to help offset the shortfall left by electric vehicle drivers not paying excise duty.

Pay-per-mile schemes work as they sound: drivers would pay tax based on how much they drove on British roads. The idea has been around for years and has been proposed as a simpler alternative to fuel duty, but it has gained popularity with the growth of electric cars.

Chancellor Rachel Reeves is reportedly considering such a plan and was recently urged to implement one by a group of transport industry bodies such as the RAC. The levies on petrol, diesel and other fuels currently generate around £25 billion a year in revenue for the Treasury.

On Thursday, Conservative MP Alicia Kearns said introducing such a scheme would be disproportionately unfair to people living in rural communities. She also said it would have a negative impact on armed forces workers working far from home, disabled drivers, parents of disabled children and carers.

She said the average motorist would face £444 in charges under the scheme, but motorists living in rural areas and driving more frequently could face bills of up to £600.

She said she had polled some voters and found that 81% disagreed with the idea. However, 78% would not consider reducing their car use as a result, which would negate the environmental benefits.

Kearns said, “We should not be punished because of where we live.”

What is a ‘pay-per-mile system’?

Under a ‘pay per kilometer’ system, road users pay an amount based on the distance they travel in a certain period.

According to accountancy firm PwC, the government could lose £9bn in fuel tax revenue by 2030 as a result of electric vehicles. In March 2022, the Conservative government introduced a 5p per litre cut in fuel duty. Prior to this, the fuel rate had been frozen at 57.95p since March 2011.

And with Reeves warning that Labour is running a budget deficit, it has been suggested that a ‘pay per mile’ system could balance the government’s finances.

How could that work?

‘Pay per kilometre’ systems use barriers on specific roads, GPS or in-car odometers, or satellite monitoring, with road users often paying in advance.

Under Singapore’s ‘pay per kilometre’ system, users pay more to use the road during peak hours.

Public transport charity Campaign for Better Transport (CBT) has called on Reeves to introduce a pay-per-mile scheme in the UK for electric car drivers.

Other campaigners, including Simon Williams, head of policy at the RAC, have called for fuel duty to be replaced entirely with a pay-per-mile system.

Under CBT’s proposed plan, drivers of zero-emission vehicles (ZEVs), such as electric cars, would be taxed based on the distance they drive.

Campaigners at the CBT have called for these drivers to be charged less than drivers of standard fuel vehicles, but to be charged a ‘fair rate’ for their use of the road.

Under the proposed plan, drivers who purchase a ZEV before the implementation date would be exempt from the charge, accelerating the transition to electric driving.

CBT proposed that the system could work using regular odometer readings (rather than using roadside cameras or satellites).

What are the benefits?

The benefits of the ‘pay per kilometre’ system proposed this week are that it will create a level playing field for drivers of petrol, diesel and electric cars and offset the expected fall in fuel duty.

Advocates argue that a change in taxation is inevitable as electric vehicles become more widely adopted, and argue that “pay per mile” is the fairest option.

The RAC has also suggested that introducing a pay-per-mile system for both electric and petrol- or diesel-powered vehicles could lead to retailers charging drivers more fairly for petrol and diesel.

Simon Williams, head of policy at the RAC, said: “Normally we would oppose an increase in excise duty, but we have long said that drivers are not benefiting from the current discount due to the much higher than average margins of retailers.

“As more electric vehicles come onto the road, governments will need to tax drivers differently.

“We believe that replacing fuel excise with a per-kilometre system as soon as possible is the way forward, as the only tax on fuel would be VAT. This would leave retailers nowhere to hide.”

According to the RAC, retailers’ margins (the difference between what they pay for fuel and the price at the pump) were 10p per litre for both fuels last week, compared with the long-term average of 8p per litre.

CBT leads a forum of 37 organizations involved in transportation. According to the organization, they would all “support a measure by the Ministry of Finance on motor vehicle tax.”

The Passenger Transport Confederation, which represents bus and coach companies, said a pay-per-use tax on vehicles could “help reduce congestion”, making public transport “more attractive”.

Silviya Barrett, director of policy and campaigns at CBT, said: “The new Chancellor faces a looming black hole. It should be cheaper to drive a zero-emission vehicle than one that pollutes more, but it is fair that these drivers pay their fair share, and a pay-as-you-drive model can achieve this.”

What are the disadvantages?

Such a toll system would hit people in rural areas or those who rely on their cars harder than other road users, as Kearns points out in her letter.

Other activist groups argue that paying per mile will be expensive and raise concerns about drivers’ privacy if they are tracked.

The policy would also likely have a negative impact on workers who rely heavily on their cars, particularly in the care sector, where caregivers rely heavily on their own cars to get around.

It would also be a burden for people who regularly travel by car in areas where public transport is not well organised.

It is also said that such measures are ‘regressive’ and mainly aimed at people with lower incomes.

Alliance of British Drivers spokesman Ian Taylor said: “We are still not happy with the principle of road charging.”

“It is a regressive tax, and the means of implementation are not cheap. In addition, people’s movements need to be tracked constantly, which brings with it its own privacy concerns.”