On the 8th July, the government published a policy paper on the changes to the Vehicle Excise Duty (VED) rates. This was originally set out in ex-Chancellor George Osborne’s 2015 budget.
Now, for you and me, that means the changes to our car tax/road tax rates. But fear not, we’ll explain what the car tax changes are, and what will and won’t change.
But first, let me explain what VED is and why we, the taxpayers, have to shell out money for it.
A brief history of road tax
A lot of people think our hard earned cash we pay in road/car tax goes towards paying for our roads. However, this is merely a common misconception. It’s actually our general and local tax that pays for our roads. VED tax, or car tax as it’s more commonly known, goes into the consolidated fund of 1926, as set by Winston Churchill.
Prior to that, it did partially fund our never ending need to fill the potholes on our roads. But, when the motorcar boom of 1896-1936 happened, the British road network grew too quickly for car tax to cover the need for better quality and more numerous roads. And so local and general authority had to step in and start paying their part. Since then, roads have been funded by the government and not directly by the tax we pay on our vehicles.
Although when you think about it, it all comes from the same consolidated pot so technically, our road tax does somewhat impact our road fund. But I digress. Let’s get to the stuff you actually want to know.
Why is car tax changing?
From April 2017, car tax will change. It should be noted before we go any further, that these changes will only apply to NEW cars. So, those first registered after the 1st of April 2017. So when you’re told about the new rules come April 1st, it’s not an April Fools joke.
Because of government targets for manufacturers, cars are getting more and more efficient every year.
While this is excellent news for our environment, it’s not so great for our Government and their car tax money pot.
Now, that’s not to say these changes came from our Government wanting more money, of course not. No, it’s come to us taxpayers being given more fairly balanced tax, dependant on our vehicle choice.
When the current VED system was introduced in 2001, the average new car emission level in the UK was 178g/km. This would put them in band I, paying around £230 by 2016 standards. In 2003, band A was introduced to encourage people towards the lower emission cars. But, the average was still relatively high at 178g/km.
What this did was move a whole lot of fairly efficient cars into band A, removing their tax contribution. Initially, this wasn’t a problem. If anything, it encouraged lots of people to opt for more efficient cars and helping to reduce UK emissions as a whole.
However, when you see that our current average emission rate has fallen to 125g/km and is set to reduce even further to 95g/km in 2020, you can see why the Government saw fit to add more lower-end bands to compensate.
As the current VED system doesn’t give a whole lot of options for cars which generate under 100g/km in CO2 emissions, and given the increase in cars capable of that number, it skews the system.
What the Government have now done is created additional bands within the 0-100g/km band (band A) to better represent the current car market. They’ve also combined some of the higher bands into larger groups, again to represent the market a bit more ‘fairly’.
And, when you look at the Exchequer impact (Those who are responsible for collecting your taxes), it’s clear to see why they’re keen to change them.
How much will the new road tax cost?
Thank you for being so patient, I know you’ve been waiting for this bit.
The changes to the road tax can be summarised by:
- First Year Rates: Vary depending on the CO2 Emissions of your chosen vehicle
- Standard year (second and subsequent year) rate: £140 (unless you have a zero-emission car in which case it will be £0)
- Any car costing above £40,000 will have a £310 supplement added on top of the standard year rate.
And, that’s it.
From now on, every car above 1g/km will have a yearly charge of £140 after their first year payment, which will depend on their emission band. And, if your car is worth more than 40k, you’ll need to add on an extra £310 to that for the first 5 years of the standard rate payment (so not on year one).
You can see the new VED system, with full costs, in the graph below.
Right about now, you’re probably thinking about how much more expensive your tax is going to cost if you decide to upgrade your current car. But, that’s not necessarily the case. Overall, the average VED rate for the UK has been reduced from £166 to £140.
So, in theory it shouldn’t make too much of a change in the grand scheme of things. If anything, it’s an improvement. It will only cause issues if you’re upgrading to a much higher emission band or a car over £40k. In which case, you should already be prepared to be paying a lot more.
Exceptions to the new car tax changes
As with everything, there are exceptions to the rule.
Those on Motability will continue to get their 100% or 50% exemption discounts through their Disability Living Allowance or Personal Independence Payments.
What impact will the new car tax changes have?
According to the policy, there is expected to be a few small impacts. But no significant ones. These include;
- A small, positive effect on inflation
- An increase in car purchases prior to the change
- A slight one-off impact on small and micro businesses while the transition takes place
Essentially, the transition to the new tax bands will have the same effect as all other previous changes. People will complain for a while, then they’ll get used to it until the next changes come about.
So, due to the rising need to be more efficient and reduce emissions, and the increase in fuel efficient vehicles, the Government have changed the way vehicle tax is calculated.
The changes encourage road users to opt for the more fuel efficient vehicles when buying new cars. This will also encourage manufacturers to come up with more 0 emission (or just lower emission in general) vehicles in the future to cope with the consumer trend.
All in all, it may cost you more in the meantime, but if it decreases the UK emissions, it might just be worth it.
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