Explaining the new car tax changes for 2017

Why has the government decided on these changes to car tax?

The government says it has done this because “an increasingly large number of ordinary cars now fall into the zero- or lower-rated VED bands, creating a sustainability challenge and weakening the environmental signal in VED. Additionally, the system results in significant unfairness as owners of newer cars pay little or no VED while owners of older cars generally pay higher rates.”

This may be part of the reason, but the real reason is the revenue from VED is predicted to fall sharply from 2015-16 as new car buyers flock to take advantage of low VED rates for cars that produce the lowest emissions.

Car manufacturers have risen to the challenge of building cars that qualify for the lowest VED rates, meaning that motorists can now buy cars that have high levels of performance while sipping fuel (on paper, at least…).

This is good for the environment but bad for the government’s coffers. As an example, it is estimated that a quarter of new car owners currently pay no road tax at all, and this percentage will rise significantly in the near future.

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Are there any real losers?

Yes, even owners of the smallest least-polluting cars will pay more under the 2017 road tax changes; cars in the current VED class B (for cars that produce between 101 and 110g/km of CO2) pay nothing in the first year and then £20 a year for the next two years at the moment. This will rise to £140 per year after 2017, an increase of £380 over a typical three-year ownership period.

Cars in higher groups might pay a lower rate of VED each year from 2017 but they will pay much more over three years. 

As an example, a Land Rover Discovery Sport currently costs its owner £300 for the first year’s VED and then £210 a year after that. Under the new system, the annual rate will fall to £140 a year but the First Year Rate will rise to £500 plus a supplement of £310 a year for the first three years because it costs more than £40,000. So the new cost of VED will be £1,400 over three years, almost double the current rate.

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Are there any winners?

Yes; cars that produce a high level of CO2 exhaust emissions but cost less than £40,000 will be given a boost. This is because the Standard Rate of £140 is significantly lower than most pay in tax now, making them cheaper to run over three or more years from 2017-onwards, even when the FYR is taken into account.

This loophole seems unfair given that the owners of small, low-polluting cars are so much worse off under the new scheme. In fact, it is estimated that more than 90% of the extra revenue the scheme will generate will come from drivers of cars that emit less than 130g/km.

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Are there any surprises?

There are a few, as illustrated below – the Jaguar F-Pace, for example, is an SUV so you might expect it to appear in the higher categories, yet due to its low CO2 emissions, it's only as expensive to tax as a Honda Jazz. 

And the Range Rover Sport has a relatively high CO2 emission and falls into the £800 FYR bracket, yet still works out cheaper under the new car tax rules in the long run than it did before. 

It just goes to show that it’s always worth doing your sums and your research when you buy a new car!

Is it retrospective?

No; these car tax changes will not apply retrospectively, so you don't need to worry if your vehicle was registered before 1 April 2017: only new cars bought after April 2017 are affected by the VED changes.

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A word from a DVLA expert

Helen Jones, Vehicle Service Designer with the DVLA, spoke about the forthcoming changes to Vehicle Excise Duty.

“The Chancellor announced changes to the way in which car tax is calculated in the 2015 summer budget. From April 1, 2017 the vehicle tax rates for new cars will change; we have been working closely with the motor industry and motor dealers to ensure that anyone thinking about buying a new car will understand what the changes are.

“These changes won’t affect any vehicles registered before April 1, 2017. So, if you already own a car or are thinking of buying a used car, the rates of car tax will not be changing. However, if you are considering buying a new car that will be first registered from April 1, 2017, you will need to know what the changes mean for you.

"The ‘first licence rate’ for car tax remains, and continues to be based on the vehicle’s CO2 emissions – though some of the values are changing, with the highest polluting cars paying £2,000.

"The second time the vehicle is taxed, you will pay one of three standard rates that are based on the car's fuel type:

1) For petrol or diesel vehicles, the tax rate is £140 per year.

2) For ‘alternative fuel’ vehicles (such as hybrids and bioethanol) it’s £130 per year.

3) Vehicles with zero CO2 emissions – such as fully electric – will have a £0 (zero) rate.

"The last thing you need to know is that if the car has a manufacturer’s list price of over £40,000, you’ll have to pay a new additional rate of £310 on top of the standard rate for five years. After this, the car will be taxed only at the standard rate for that type of vehicle.

"If you are thinking about buying a brand new car from April 1, 2017, it’s essential to understand these changes. Go to gov.uk/newvehicletaxrates for more information."

The First Year VED tax bands in context

0 CO2 emissions

A brand new Nissan LEAF purchased after 1 April 2017 would cost you £0 in car tax for the first year, and £0 in the following years - not a bad deal!

1-50 CO2 emissions

A hybrid Volvo XC90 would cost you £0 in car tax for the first year, then due to its hybrid status, would cost £130 a year for the next five years - however, its £60,000+ price tag would also mean you'd need to pay the yearly premium of £310.

76-90 CO2 emissions

A hybrid Hyundai IONIQ (79 CO2) would cost you £90 in car tax for the first year, and then £130 a year for the next five years.

111-130 CO2 emissions

A brand new Honda Jazz (116 CO2), Audi Q2 (117 CO2), Renault Megane (120 CO2), Vauxhall Astra (124 CO2) and a Jaguar F-Pace (129 CO2) would all cost £160 in car tax for the first year, and then £140 a year for the next five years.

131-150 CO2 emissions

A Ford Focus (136 CO2) would cost £200 in car tax for the first year, and £140 a year for the next five years.

However, a non-hybrid Volvo XC90 (149 CO2) and an Audi SQ7 (150 CO2) would cost £200 for the first year, and £140 a year for the next five years - but would also qualify for the additional yearly premium of £310 as they both cost over £40,000 to buy new.

171-190 CO2 emissions

A brand new Range Rover Sport (185 CO2) would cost a whopping £800 in car tax for the first year, £140 for the next five years, and you'd also need to pay the £310 premium.

The full government briefing paper can be read here.

For more tips and useful information, browse our motoring articles.

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