New road tax system announced at Budget

budget-2015

Following the Conservative Party’s success at the 2015 General Election, this year’s Summer Budget Statement ushered in a new system of Vehicle Excise Duty that is designed to create a new roads fund by 2020.

At the same time, Chancellor George Osborne also announced that fuel duty would be frozen for the rest of this year in line with the Budget in March but did not announce a further cut.

Fuel duty will now have been frozen for five years by the end of 2015-16, the longest period since the mid-1990s, although a number of motoring organisations would have preferred to see a cut.

However, it was the creation of a new Vehicle Excise Duty mechanism that would be used to fund new roads that caused the most interest amongst fleet pundits.

Vehicle Excise Duty, or road tax, currently raises around £6bn for the Exchequer, but the amount has been falling in line with decreasing carbon emissions.

As a result, by 2017 three-quarters of new cars won’t pay VED, said the Chancellor, adding: “This is not sustainable and it isn’t fair.” Instead from April 2017, a new VED system will be introduced and will be used to create a new roads’ fund by the end of the decade.

This would be “a long-term solution if we are going to fix Britain’s poor roads,” the Chancellor said. While there will be no change to VED for existing cars, for all new cars the duty in the first year will be set according to emissions, like today, but updated for new technology. Thereafter, there will be three duty bands – zero emission, standard and premium.

For standard cars – which covers 95% of all cars sold in the UK – the charge from April 1, 2017, will be a flat rate £140 a year. This is less than the average £166 that motorists pay today, but the new system is expected to only raise the same amount of revenue as today. However, said the Chancellor, “this revenue will be secure for the long term”.

The Chancellor told the House of Commons that from the end of this decade, “every single penny raised in Vehicle Excise Duty in England will go into that fund to pay for the sustained investment our roads so badly need.”

VED bands and rates for cars first registered on or after April 1 2017

CO2 emissions (g/km) First year rate Standard rate 
0 £0 £0
1-50 £10 £140
51-75 £25 £140
76-90 £100 £140
91-100 £120 £140
101-110 £140 £140
110 -130 £160 £140
131-150 £200 £140
151-170 £500 £140
171-190 £800 £140
191-225 £1200 £140
226-255 £1700 £140
Over 255 £2000 £140

 

Cars with a list price of above £40,000 will attract £310 per year for the first five years in which the standard rate is paid.

However, the move did not meet with universal approval. The Society of Motor Manufacturers and Traders said the changes were “a surprise and a concern”.

The Society said while zero-emission cars would remain exempt from VED, the new regime would act as a disincentive to the take-up of low emission vehicles and new technologies such as plug-in hybrids, would not benefit from long-term VED incentives, threatening the ability of the UK automotive sector to meet ever stricter CO2 targets.

Mike Hawes, SMMT chief executive, said: “The introduction of a surcharge on premium cars also risks undermining growth in UK manufacturing and exports. British-built premium cars are in increasing demand at home and globally, and the industry helps to support almost 800,000 jobs in the UK. Levelling a punitive tax on these vehicles will almost certainly impact on domestic demand.”
Under the new system, VED on low-CO2 cars in particular will go up significantly in the first two years’ of ownership.

For example, the first two years’ VED on a new car emitting 119g/km is currently £30. From April 2017 it will be £160 in the first year, and £140 in the first standard rate year, a total of £300 or a ten-fold increase.

Some high emission vehicles will actually fare better under the new system compared to the old.

For example, on a low emission car of 90g/km with a list price of less than £40,000, the VED costs would be £0 for the first four years of its life if registered pre-April 2017.

But, if it is registered after April 1, 2017, the VED costs increase to £520 over the first four years under the new rules, paying the first year rate of VED, followed by three years at the standard rate.

However, a high emission car of 250g/km, would see VED costs of £2,340 if registered pre-April 2017; but this would fall to £2,120 if registered post-April 2017 over the next four years. Therefore, the costs decrease by £220 as a result of the new rules.