The way Vehicle Excise Duty (VED) is calculated is changing for some vehicles registered from 1 April 2017.

Please note all vehicles registered before this date will not be affected.

THE BASICS.

The first vehicle licence will be calculated on the vehicle’s CO2 emissions. The majority of vehicles will then move to a standard rate of £140 annually from the second licence. Cars with zero emissions will not pay the standard rate of vehicle tax. However, if a car’s list price is over £40,000 at first registration, the customer will pay the additional rate for five years after the end of the first licence.

Why is the system changing?

In 2015, former Chancellor George Osborne highlighted that without an overhaul of the current system, around 75% of new cars would be eligible for free road tax by 2017. According to Osborne, a steady revenue from vehicle tax is needed to fund essential road maintenance throughout the UK.

Three new bands will be introduced “to make the tax fairer, simpler and sustainable”, and to encourage people to choose the cleanest cars. They are:

  • Zero (cars with no emissions);
  • Standard (most vehicles); and
  • Premium (cars costing £40k or more).

First year and fixed rates.

Emissions will only be taken into consideration for the first year's tax bill. After that, a standard rate applies. This aims to make road tax fairer for drivers with older cars, which can be very expensive to tax under current regulations. Despite this, the cost of road tax will still depend on which band your vehicle falls under. After the first year, payment will be as follows:

Zero

  • Cars worth less than £40k are VED free
  • Cars worth more than £40k will be subject to a £310 surcharge for the first five years

Standard

  • £140 per year

Premium

  • £140 per year
  • £310 surcharge for the first five years

Sports cars and SUVs (large cars with four-wheel-drive) that cost less than £40k, and have emissions of 226g/km and above, will actually work out cheaper under the new regime. Buyers could save £600 over the first five years and a huge £2,500 over ten years under the flat-rate system.

NB: changes only apply to cars first registered after 1 April 2017. If you register your new car by 31 March 2017, the updated road tax rates won't apply.