Changes to the car tax system in 2017

Carlton Boyce / 26 July 2016

In 2017, a new three-tier system will be introduced for rates of Vehicle Excise Duty (VED). We look at the changes to car tax and how they will affect you.

Planned changes to the way we tax our cars are coming. Here’s our guide to the changes to the rates of Vehicle Excise Duty (or VED): will you be a winner or a loser?

What are the changes?

Essentially, the changes mean that future VED rates will be on a new three-tier system from 1 April 2017. The new scheme will be based on the vehicle’s emissions and list price:

  •  Zero emissions cars won’t pay any VED.

  • A standard rate of £140 will apply for all other cars, regardless of how high their emissions are. However, the First Year Rate (FYR) will be a sliding scale depending on how polluting a car is. The rate starts at £10 for the first year, rising to a whopping £2,000 for the worst offenders. The full list of First Year Rates can be seen here.

  • There will also be a premium of £310 levied on all cars with a list price in excess of £40,000 for the first five years. This will include electric and other zero emission cars.

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Why has the government done this?

The government says that 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 new scheme; 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 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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Is it retrospective?

No, these changes will only apply to new cars sold and registered after 1 April 2017.

The full government briefing paper can be read here.

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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.