Where does Vehicle Tax go?

Vehicle Tax, also known as Vehicle Excise Duty (VED), and once better known as car tax, is something that we all have to pay if we want to drive our cars. The same way you have to pay company car tax if you want to drive a company car.

Like it or loathe it, it’s a necessary part of driving here in the UK. But, where does Vehicle Tax actually go?

In this article, we explore where the money from vehicle tax goes and what it pays for.

What is Vehicle Tax?

Firstly, let’s have a look at what car tax actually is.

Vehicle tax is a tax that is levied as an excise duty (hence the name Vehicle Excise Duty) and must be paid for vehicles that are to be driven (or parked) on UK public roads. Vehicle Tax was first introduced in the 1888 budget. In 1920 it was updated so that it applied specifically to motor vehicles.

The tax we now pay as drivers in the United Kingdom goes into the consolidated fund of 1926, which was set up by the Chancellor of the Exchequer at the time, Winston Churchill.

Essentially, vehicle tax is something we have to pay in order that we are permitted to park and drive our cars on roads in the United Kingdom.

What does vehicle tax pay for?

Contrary to popular belief, road tax doesn’t actually pay for our roads. Our local and general tax pays for our roads, and the money we pay in road tax goes into the consolidation fund we mentioned above.

Once upon a time, road tax did pay for our roads. But, the motorcar boom of 1896-1936 happened and the money the government received in vehicle tax simply wasn’t enough to cover our sudden need for more roads and roads of better quality. So the authorities, both local and general, stepped in and started paying for it. And since then, our roads are funded by the government and not directly by what we pay in road tax.

You could point out that it all comes from the same consolidated fund, and you would be right. So technically some of our road tax money does pay for our roads, but it doesn’t directly pay for them. So, what does vehicle tax actually pay for?

Due to the way that the tax is divided up once it’s paid into the central government fund (where your Income Tax is also managed) it’s hard to say, exactly what your VED goes towards. However, we know that it is used to fund multiple ventures that everyone benefits from.

Infrastructure

This includes the building of new roads, as well as widening existing roads, building tunnels and the construction of all the things tha are needed to make the lives of drivers that much easier.

If you’re stuck in a tailback on the motorway thanks to roadworks just tell yourself that this is something being done to make future drives that much better.

Local projects

Taxes from the central government fund that are paid to the council go to help run the projects in their local areas.

These projects are not limited to those that are focused completely on the roads, which include road resurfacing, fixing potholes and improving car park facilities. They also include local social projects such as park upkeep and local, council-run properties such as the town hall, local museums and libraries, as well as services such as rubbish collection and street lighting.

Due to the nature of the central government fund that Vehicle Excise Duty is paid into, it’s not clear exactly where every single penny goes. Well, not specifically, anyway. We know that it goes to the same place as the monies that come from Income Tax, so it will also go towards helping fund hospitals, schools and the welfare system, as well as the railways and housing.

What we do know is that it doesn’t go solely to a fund specifically focused on the upkeep of our roads, though money from the fund is used for this.

Who pays Vehicle Tax?

Essentially, if you drive, or park your car, on UK roads then you have to pay vehicle tax.

It is also worth noting that even if you do qualify for an exemption, you are still required to apply for vehicle tax.

How do I become exempt from paying Vehicle Tax?

There are a few exemptions to every rule, and below we have listed the ways that you would qualify for an exemption to paying Vehicle Tax. However, you do still need to apply and then provide evidence for the exclusion.

Vehicles used by a disabled person

When you apply for vehicle tax you can claim a disability exemption. In order to be eligible for the exemption, you will need to meet certain criteria and the vehicle must be registered in the name of the disabled person. If you get any of the following you can apply for the disability exemption:

• The higher rate mobility component of the Disability Living Allowance
• The enhanced rate  mobility component of the Personal Independence Payment
• The War Pensioner’s Mobility Supplement
• The Armed Forces Independence Payment

Disabled Passenger Vehicles

If you are an organisation that provides transport for disabled people then you are exempt from paying vehicle tax. However, this exemption does not extend to ambulances.

Mobility scooters, powered wheelchairs, and invalid carriages

In order to qualify for the exemption, any of the above vehicles must have a maximum speed of just 8mph on the road. They must also be fitted with a device that limits them to a speed of only 4mph when they’re on footways (pavements).

Historic vehicles

If your vehicle is over 40 years old as of the first of January, then you are exempt from paying any vehicle tax, which is great if you love yourself a classic car.

Electric vehicles

The rules on electric vehicles changed slightly in April 2019.

If the power of your electric vehicle comes from an external source or an electric storage battery and it is not connected to a source of power while moving (e.g. Hybrid) then it is exempt.

However, if the purchase/list price of your electric car is over £40,000 and it was registered after 6th April 2021, then you will be required to pay a tax of £335 per year. 

In order to qualify for the vehicle tax exemption, the mower must have been designed and produced solely for the purpose of cutting grass. This exemption does not include tractors that are used to tow gang mowers.

Steam vehicles

Though it’s not likely you’re going to be driving Stephenson’s Rocket along your local high street, if you are driving a steam-powered vehicle then you are exempt from paying vehicle tax.

Agricultural, horticultural and forestry vehicles

This includes tractors, agricultural engines and light agricultural vehicles that are primarily used off-road.

You are allowed to make short journeys on the public roads, as long as they are no longer than 0.9 miles (1.5km) on roads that are between land which is owned/occupied by the same landowner.

How is Vehicle Tax calculated?

So how is the amount of vehicle tax we have to pay worked out?

The amount of tax you have to pay depends on how much CO₂ your car emits. The more CO₂ your car emits, the more you have to pay. So you could call it an emissions tax if you wanted to. Vehicle tax is calculated as follows:

• First year rates
  • This varies depending on the CO₂ emissions
  • Payments range from £0 for 0g/km CO₂ emissions, to £2,135 for cars that emit over 255g/km CO₂
• Standard year (second and subsequent years)
  • £135 – £145
• Any car with a list value above £40,000
  • This payment varies, dependent on whether your car is petrol or diesel (£465), electric (£320) or alternative* (£455)

*Alternative fuel vehicles include: hybrids, bioethanol and liquid petroleum gas.

And that’s how vehicle tax is calculated.