Vehicle Tax is Changing

The current system used for taxing a new car is about to change, here's what you need to know!

The changes, announced by the Chancellor in the 2015 budget, set out that from next year, 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.

What is happening to car tax this year?

The amount of VED you pay will still be based partly on your car's CO2 emissions. New cars will still be divided into 13 different CO2 bands, which will determine how much you pay in the first year of ownership, but only zero-emission vehicles, such as electric cars, will qualify for the lowest band and therefore be tax-free.

From the second year onwards, zero-emission vehicles that cost less than £40,000 new remain tax-free, while a flat rate of £140 a year will be payable forall petrol, diesel and hybrid cars that cost less than £40,000. Cars that cost more than £40,000 attract an additional 'Premium' fee of £310 for years two to five of ownership, regardless of their emissions.

This means that electric cars which cost more than £40,000 – and currently qualify for free car tax every year – will no longer be the tax-busting option they are currently after year one.

Also, bear in mind that it's the final list price of your car which determines that £40,000 threshold – if you buy a cheaper model, but add options that take the price over that point, you'll still have to pay the Premium fee. In short, an option costing a few hundred pounds could end up costing you more than £1500 over five years in extra car tax costs.

Even if you negotiate a discount with the dealer that drops the price of the car back under £40,000, you'll have to pay the fee, because the listed price will still be more than £40,000. The list price is the price of the car before the 'on-the-road' charges are added, such as a delivery charge, new vehicle registration fee, numberplates and fuel.

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Below, you'll find a full table detailing how much you'll have to pay in the first year, and in the years thereafter.

​New VED system - for cars registered on or after 1st April 2017

Emissions (g/CO2/km)​First Year Rate​Standard Rate*
​1 - 50​£10​£140
​51 - 75​£25​£140
​76 - 90£100£140
​91 - 100​£120​£140
​101 - 110​£140​£140
​111 - 130​£160​£140
​131 - 150​£200​£140
​151 - 170​£500​£140
​171 - 190​£800​£140
​191 - 225​£1,200​£140
​226 - 255​£1,700​£140
​over 255​£2,000​£140

* Cars over £40,000 pay £310 supplement for 5 years​

What are the current car tax rules?

Currently, car tax is determined solely by CO2 emissions, with the value of the car not taken into account. Cars that emit up to 100g/km of CO2 attract no tax at all, and cars that emit between 101-120g/km of CO2 attract only small amounts. It's not until you get to 121g/km of CO2 that you start to pay significant amounts of car tax.

Should I wait until 1st April 2017 to buy my new car?

The new rules still make it financially rewarding to own some pure electric cars; if you're looking for something like a Nissan Leaf, then you will still pay no car tax at all.

If you're thinking of a premium electric car, then you'll be worse off if you wait, because of the new £310 Premium car supplement.

The hardest hit cars will be low-emission combustion-engined cars and hybrids. Take the Nissan Qashqai, a former What Car? Car of the Year, as an example. Our favourite 1.5-litre dCi N-Connecta version emits just 99g/km of CO2 which, under the current VED system, means you don't have to pay any car tax. If you buy the same car on or after 1st April 2017, however, you'll pay £120 in the first year, and £140 thereafter. Over three years, that's an extra £400.

More eco-friendly models with a list price of more than £40,000 are even more severely penalised. However, cars that were 'dirty' enough to be in the top tax band previously actually work out cheaper if you keep them for more than five years.

What about cars that are already registered?

If you buy your car before 1st April 2017, you won't be affected by these changes because they only apply to cars registered on or after that date. Your car tax will continue to be calculated using the old system of CO2 emissions, meaning that in the vast majority of cases you'll be better off.