19 Jan 2017

The government is introducing new regulations regarding Vehicle Excise Duty (VED) in 2017. The method for calculating Vehicle Excise Duty (VED) on some types of cars is being changed and the impact of these changes are likely to be considerable.

We explain what the changes are and what they may mean for vehicle owners.

Q. Why has the government made these changes?

The changes are a response to falling revenues from Vehicle Excise Duty (VED). Until the end of February 2001 car tax was calculated based on engine size, where cars with larger engines were taxed at a higher rate than cars with smaller ones. However, in 2001 there was an important departure from the system of taxation based on engine size. From 1st March 2001 onwards the amount of VED payable by drivers was calculated using a formula based on the car’s CO2 emissions. These taxation arrangements were designed to encourage ownership of low emission vehicles with the lowest CO2 emitting vehicles incurring little or no tax. The problem for the government was that car manufacturers were improving the CO2 emissions of new cars all the time. This meant that more and more cars owners were paying reduced or no VED and  the amount of revenue the government was receiving from car owners through VED started to fall, as a consequence.

Q. What are the changes?

The changes are are reasonably straightforward:-

  • The new rates will only apply to new cars registered on or after 1st April 2017;
  • Rates for cars registered before 1st April 2017 will not change
  • Cars built more than 40 years ago (such as classic cars) are exempt;
  • Motorists with cars that cost less than £40,0000 and emit no CO2  (electric or hydrogen powered vehicles) will pay no VED;
  • Cars valued at £40,000 or more will incur an additional £310 VED (£450 in total if the vehicle emits any CO2) in each of the first 5 years of the scheme after which they will revert to paying £140 if they emit CO2 and nothing if they have zero emissions;
  • The rate in year 1 will be based on the carbon dioxide (CO2) emissions of the vehicle;
  • In year 2, and subsequent years, qualifying vehicles will incur a flat rate of £140 VED;

Q. What will be the impact on motorists?

The new scheme is based on a formula that is weighted towards low and zero emission cars and it is anticipated that this will stimulate demand for both low or zero emissions vehicles.

Motorists with  low-emissions cars and who paid no VED will find that they are longer exempt.

First year charges may double for new car owners so motorists thinking of buying a new car should consider if it makes sense for them to buy before the change in VED or after. For example, a vehicle with a CO2 rating of 100g/km or less with be free of VED if registered before 1st March 2017, and if registered after that date, VED will be £120 in the first year and £140 in subsequent years. That amounts to a saving of nearly £1,400 over a 10 year period.