Taxi Tax Confirmed: What This Means for Drivers and Passengers

Key points:

• The UK Government has confirmed the 20% VAT on private hire fares, dubbed the "Taxi Tax", will take effect from 2nd January 2026.
• The cost is expected to be passed directly to customers, meaning a £20 fare will increase to £24.
• 70% of surveyed passengers said they would reduce or stop using private hire services altogether if fare prices increased.

The 2025 Autumn Budget, delivered by Chancellor Rachel Reeves on Wednesday, 26th November 2025, confirmed the controversial measure dubbed the "Taxi Tax" . This change introduces a 20% Value Added Tax (VAT) liability on private hire fares. Previously, 59 taxi and private hire vehicle companies had written an open letter urging the Government to reconsider the financial impact on drivers and passengers.

With the proposal now confirmed, the central question remains: What does this confirmed 20% VAT mean for private hire drivers?

What is the Taxi Tax?

Currently, most private hire and minicab operators outside of London are not required to charge VAT on passenger fares. This is generally because the drivers are considered self-employed contractors who fall below the VAT registration threshold of £90,000 per year.

The confirmed "Taxi Tax" introduces a blanket 20% VAT on fares across the country by legislating the exclusion of the Tour Operators Margin Scheme (TOMS), effective 2nd January 2026.

For you, the driver, this means you and/or PHV operators will have no choice but to pass the cost onto passengers.

For example, a typical £20 journey will increase to £24.

Will the Taxi Tax Impact Customer Demand?

The primary concern for all private hire drivers has been what this fare increase will do to customer demand and your earnings.

A recent survey by brokers The Taxi Insurer found that 70% of the public would reduce or stop using PHVs altogether if a 20% VAT was added to fares. A sharp drop in trip volume means fewer rides for you and increased competition on the road.

Operators warned that this hike would particularly affect working families, as well as the elderly, disable, and rura passengers who rely on PHVs for essential journeys like community, healthcare, and education. Some PHV operators report that trips like these made us as much as 50% of driver journeys.

Why are Taxi Drivers Fighting Back?

In the run up to the budget, 59 PHV companies sent an open letter to Chancellor Rachel Reeves, warning that applying a blanket 20% VAT rate would:

• Threaten Viability: Hundreds of small and medium-sized operators would face significant challenges with falling driver and passenger numbers.
• Undermine Essential Transport: Rural areas could be worse off, especially where public transport is already limited.
• Damage Local Economies: The tax could harm the night-time economy, which relies on affordable, accessible transport for staff and customers.

What's Next for PHV Operators and Drivers?

The Government published its long-awaited response to the consultation on VAT treatment of private hire vehicle fares.

Chancellor Rachel Reeves confirmed a Key Reform: the Government will legislate to exclude suppliers of private hire vehicle and taxi services from using the Tour Operators Margin Scheme (TOMS), effective from 2nd January 2026.

This decision effectively closes the tax loophole that allowed some large ride-hailing operators to pay an effective tax rate significantly below the standard 20% on billions in revenue, a practice critics, like the Licensed Taxi Drivers' Association (LTDA), argued created a grossly uneven playing field.

The Outcome for PHV Operators and Drivers

• The standard 20% VAT rate will continue to apply to fares by VAT-registered businesses. The removal of TOMS locks in this full liability for major ride-hailing platforms like Uber and Bolt, who will now have to decide whether to absorb this cost, pass it on to passengers as a fare increase, or adjust driver earnings.

• The market has gained clarity. The Government will not introduce a reduced VAT rate or change the underlying legislation that supports the business models of smalle, non-VAT-registered operators.
• The LTDA hailed the moved as a "landmark moment for fairness" to ensure competition is based on service and quality, while large platforms have warned the change will mean "higher prices for passengers" and "less work for drivers".

For drivers, focusing on efficiency and providing excellent service remains the best long-term strategy to keep your business strong and maximise your earnings in this new regulatory environment.

Frequently asked questions:

Is there VAT on private hire taxis?

Yes - but only if you, or the business you're contracted to, makes over £90,000 per year through your business.

Self-employed or independent drivers typically don't meet this threshold, and therefore don't charge VAT.

Who will pay the Taxi Tax?

Fare hikes will likely be passed onto customers. E.g. a £20 fare with 20% VAT would cost the customer £24.

When will the Taxi Tax start being charged?

The Chancellor confirmed the legislation will take effective from 2nd January 2026.

From this date, the major VAT-registered private hire operators will be legally excluded from using the TOMS scheme, forcing them to account for the standard 20% VAT on the full fare.

Are you looking for insurance that help you protect your livelihood? Consider INSHUR. Built for private hire taxi drivers, our 30-day or annual policies offer four levels of coverage, with additional benefits for Uber drivers.

Start your quote with us today and see how INSHUR can protect you.

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