Watch out for the impact of the changed Vehicle Excise Duty rates

You might recall that little paper disc you placed in the corner of your car’s windscreen every six or 12 months.

No need now, of course, as Vehicle Excise Duty – or the tax disc as we all knew it – is digital. But just because it’s gone physically we should not forget about it, since how Vehicle Excise Duty is applied will change from April 2017.

It’s something the previous chancellor, George Osborne, managed to slip quietly into his July 2015 Budget while still in power at Number 11 Downing Street.

In essence the current CO2 based bands are being reformed with fewer cars exempted from the £0 Vehicle Excise Duty band.

The best way to explain what is happening is to understand that there are two elements to Vehicle Excise Duty (or VED) in the future.

The first year is still based on a graduated table of CO2 emissions, with cars falling into bands, be-ing charged as little as £10 (1-50g/km CO2) and as much as £2000 (CO2 above 255g/km). Cars with zero emissions will be exempt from first year VED.

But after that first year, virtually all cars are required to pay a yearly £140 standard rate from year two to year five inclusive. In addition to the standard rate, there will be a zero and expensive rate.

Zero will apply for zero emission vehicles only; standard for all remaining cars except if a car costs beyond £40,000, in which case it goes into the expensive category with an additional £310 levied on top of the £140 standard rate.

So how does it work in practice?

Let’s take the Tesla Model S as an interesting example: there is £0 VED to pay in the first year be-cause it is an electric vehicle, but in the subsequent five years there will be the £310 supplement for cars costing over £40,000.

Taking a more standard fleet model – a low emission Vauxhall Astra Hatchback 1.6 CDTi Tech Line 110PS S/S ecoFLEX – with CO2 emissions of 88g/km (which currently pays no first year VED and no subsequent VED in following years). Under the new VED system this is what you can ex-pect to pay:

• First year rate: £100 (it falls in the 76-90g/km category)
• Standard rate: £140
• Additional three year cost over existing VED scheme: £340

So what happens if you take a more expensive car that breaks through the £40,000 barrier? Let’s have a look at the Mercedes-Benz E-Class Saloon E 220 d AMG Line Premium 9G-Tronic (price, £41,170).

Currently the VED on this car, which emits just 112g/km, is £0 in the first year; £30 in subsequent years. But look what happens under the new VED banding scheme.

• First year rate: £160 (it falls in the 111-130g/km category)
• Standard rate + expensive car supplement: £140 + £310 = £450
• Additional three year cost over existing VED scheme: £1000

Surprising isn’t it?

So there are plenty of complicated changes going on here that will impact on fleet costs.

If you run a fleet of just five of those Mercedes E-Classes we’ve considered then you are adding £5000 to your fleet costs over a three-year operating cycle. But a slight altering of fleet policy to an E-Class below the £40,000 price point will have a positive impact on operating costs.

One final point I should add is that if a car is bought or funded before 01 April 2017 then the existing VED bands will apply.

So if you have any lease cars coming up for change then it is worth taking action soon to avoid any of these forthcoming changes in the short term – especially as some manufacturers have some long lead times.

My team is always on hand to give you any advice that you need.