A new system of vehicle excise duty will lead to a simpler, more streamlined system – but many low-emission cars will no longer be exempt from the tax.
Changes to the vehicle excise duty (VED) system announced earlier this month by Chancellor George Osborne mean that many makes of car will pay more road tax in future.
The reforms, which are due to come into effect in April 2017, are in response to falling revenues.
Lower tax take
At present, VED is low or zero for a large number of low-emission vehicles including many petrol or diesel-only cars.
But as new model have become increasingly environmentally friendly, Treasury VED takings have been dwindling, with fewer and fewer motorists paying the tax.
The changes will only apply, however, to cars bought as brand new and registered after the reforms come into effect.
Your current rate of VED will apply to your existing car until you sell it and buy another model.
How the system works now
At the moment, all cars in bands A (carbon dioxide emissions of up to 100g/km) to D (up to 130g/km) pay no VED in the first year.
After that, band A cars continue to be tax-free while band B vehicles pay £20 a year, band C pay £30 and band D £110.
Models with higher emissions pay between £130 and £505 a year, although some face an even higher one-off first-year charge of as much as £1,100.
This is designed to deter the purchase of the most-polluting cars.
What the changes mean
From 2017, only vehicles with zero emissions – predominantly electric cars – will pay zero VED in the first and subsequent years.
For other cars, VED rates in the first year will be based on emissions: for example, a vehicle producing between 1g and 50g/km of carbon dioxide will pay £10, but those emitting more than 255g will be charged £2,000.
In subsequent years, however, all cars will face a standard VED rate of £140 provided they produce at least some carbon emissions.
And also from 2017, buyers of high-value vehicles will face an extra charge: for the first five years, there will be an extra £310 supplement imposed on cars with a list price of £40,000 or more.
Money ring-fenced for roads
As part of the reforms Osborne said that, from 2020, the money collected in VED will be ring-fenced and put in a Roads Fund used to pay for investment in Britain’s motorways and major roads.
Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders, said that the changes were likely to harm the UK’s chances of meeting its carbon emission targets.
"We recognise the current VED system needs to be reformed and highlighted this in a recent report,” he said.
“The Chancellor’s Budget announcement on the regime came as a surprise and is of considerable concern. While we are pleased that zero-emission cars will, on the whole, remain exempt from VED, the new regime will disincentivise take-up of low-emission vehicles.
Damage to manufacturing
“New technologies such as plug-in hybrid, the fastest growing ultra-low emission vehicle segment, will not benefit from long-term VED incentive, threatening the ability of the UK and the UK automotive sector to meet ever stricter CO2 targets.”
Hawes added that the reforms could harm motor manufacturing in this country.
“The introduction of a surcharge on premium cars also risks undermining growth in UK manufacturing and exports,” Hawes said.
“British-built premium cars are in increasing demand at home and globally, and the industry helps to support almost 800,000 jobs in the UK.
“Levelling a punitive tax on these vehicles will almost certainly impact domestic demand.”
The RAC echoed Hawes’ concerns about incentives for carbon reduction, but welcomed the fact that money is to be set aside for investment in the roads networks.
RAC spokesman David Bizley said: “The changes to VED will guarantee a minimum level of spending on the roads.
"And this, combined with the Road Investment Strategy, suggest that that the critical role that road transport plays both in our economy and in motorists’ everyday lives has finally been given the attention it deserves.”