If you’re considering buying a car, there’s a certain kind of dread that sets in around budget season. You’ve done your homework, visited a showroom, and perhaps even taken a seat in the desired one. The figures on the sticker suddenly don’t add up the same as they did last week after the government announces new taxes. In 2026, car buyers are reevaluating in Pakistan and the UK, two very different parts of the world.
The government of Pakistan has spent months developing a new auto policy, which is scheduled to be announced on July 1, 2026. At a media briefing in April, Hammad Ali Mansoor, CEO of the Engineering Development Board, stated that Prime Minister Shehbaz Sharif’s main directive was straightforward: make cars more accessible for the middle class. The objective seems reasonable. However, the tax structure that lies beneath it reveals a more nuanced picture, one that includes conflicting IMF pressures, a drive for electric vehicles, and an automobile industry that is both expanding and under stress.
Car Tax Changes 2026 — Key Facts at a Glance (Pakistan & UK)
| Policy Subject | Pakistan New Auto Policy 2026 & UK Vehicle Excise Duty (VED) Reforms |
| Pakistan Policy Body | Engineering Development Board (EDB), Ministry of Industries |
| EDB CEO | Hammad Ali Mansoor |
| Pakistan Policy Expected Date | July 1, 2026 Upcoming |
| Small Car Sales Tax (Pakistan) | Currently 10–12.5% for up to 850cc; proposed hike to standard 18% under 8th Schedule amendment |
| Withholding Tax (Pakistan) | 1,300–1,600cc: 2% | 1,601–1,800cc: 3% | 1,801–2,000cc: 5% | 2,001–2,500cc: 7% | 2,501–3,000cc: 9% | Above 3,000cc: 12% — all rates expected to rise |
| New EV Carbon Levy (Pakistan) | 3%–5% on all petrol/diesel vehicles to fund Electric Vehicle Fund (est. Rs. 25–30 billion/year) |
| Small EVs Arriving in Pakistan | 3 CKD electric vehicles expected in Karachi (Q3 2026); initial price below Rs. 1 million Affordable Target |
| EV Sales Growth (Pakistan) | Electric vehicle sales tripled in March 2026 |
| UK VED Standard Rate (from Apr 1, 2026) | £200/year for petrol, diesel, or hybrid cars registered after April 1, 2017 |
| UK First-Year Tax (new cars) | Up to £5,690 for high-emission vehicles in year one (effective April 1, 2026) |
| Pakistan Total Vehicle Sales (9MFY26) | 144,029 units — up 43% year-on-year |
| Fuel Payment Surcharge (proposed) | Rs. 2–3/litre extra for cash payments at petrol stations; digital payments maintain standard 18% GST |
| Key Industry Concern | Auto parts manufacturers facing decline; new assemblers importing localised parts at 25% duty vs. CKD kits at 15% |
For regular Pakistani consumers, small cars are the most immediately appealing proposal. Currently, vehicles with engines up to 850cc are eligible for a 10%–12.5% sales tax reduction. That is a purposeful carve-out meant to keep entry-level cars affordable for families with lower incomes and first-time buyers. By amending the 8th Schedule of the Sales Tax Act, the proposed change would completely eliminate that carve-out and place these vehicles under the standard 18% sales tax bracket. If that happens, the segment that the majority of Pakistanis actually purchase—the compact, useful, reasonably priced car—becomes significantly less affordable. The government may think that the push for EVs will make up for this. Logic might also fail to convince the millions of consumers who aren’t yet prepared for electric vehicles.
The suggested modifications are equally important for larger cars. It is anticipated that all withholding tax rates, which are currently based on engine size, will increase. Withholding tax is currently 2% for cars between 1,300 and 1,600cc and 12% for cars over 3,000cc. All of those rates would increase under the new plans, carrying on the government’s 2024 transition to a value-based tax system. As a revenue-generating strategy, that change makes sense. It’s unclear if it will deter consumers from purchasing mid-range cars, especially those in the 1,600–2,000cc range that urban middle-class consumers typically prefer.
On top of all of this is another layer. Additionally, the government is proposing a new carbon levy of 3% to 5% on all gasoline and diesel vehicles, whether they are imported or assembled locally. The money raised would go toward an Electric Vehicle Fund, which is expected to generate Rs. 25 to 30 billion annually. That could amount to between Rs. 125 and Rs. 150 billion over the course of five years for infrastructure, localized production, and EV subsidies. It is obvious that the goal is to gradually move the market toward cleaner automobiles, and to be fair, some progress has already been made. Even some industry observers were taken aback by the fact that EV sales in Pakistan tripled in just March 2026. In the third quarter of this year, three small electric cars priced under Rs. 1 million are anticipated to arrive in Karachi; assembly facilities in Karachi and Lahore will follow. Additionally, two to three lithium battery manufacturers are anticipated to start local operations this year, which, if the timelines hold, could significantly alter the cost structure of the EV market.
However, the atmosphere is complex when viewing all of this from the showroom floor. Even though its nine-month year-over-year figures were up 32%, Pak Suzuki’s March sales fell 23% from February to 6,250 units. Hyundai Nishat saw a comparable monthly decline. The conflicting monthly figures show that buyers are hesitating, in part due to uncertainty around the world and in part because it’s unclear how much the car they’re considering will cost when the new policy goes into effect in July. Rather than speeding up decision-making, that kind of uncertainty tends to slow it down.
The car tax story in the UK has a different personality but a similar outcome. For gasoline, diesel, and hybrid vehicles registered after April 2017, the standard Vehicle Excise Duty rate increased to £200 annually on April 1, 2026. First-year tax bills for purchasers of brand-new, high-emission cars can reach £5,690. When people hear this amount for the first time, they are stopped in their tracks. Even though the UK changes were announced well in advance, the response doesn’t appear to have been significantly lessened.
It’s difficult to ignore the fact that both governments are attempting to use car taxes to protect domestic manufacturing, increase revenue, encourage consumers to purchase electric vehicles, and, in theory, keep costs down for regular people. These objectives don’t always point in the same direction. As a result, the tax environment in both Islamabad and London feels more like an ongoing negotiation than a clear policy, with the buyer, as usual, bearing the majority of the uncertainty.
