Many lose but some win with new road tax rules

Thinking of buying a new car in 2017? You may need to act quickly if you want to avoid being landed with extra road tax bills.

New regulations coming into effect on 1^st April will change the rate of Vehicle Excise Duty, VED or to most drivers road tax, across the board. All cars registered from this date will be subject to the new rates, and anyone desiring one of the recent breed of efficient, emissions-friendly cars will end up paying more VED. But it’s time to get the calculators out because there will also be potential savings to be made on certain cars – believe it or not, we are talking less efficient, more polluting vehicles…

Why is it changing?

The current VED system has been in force since March 2001 and is based on the amount of CO₂ a car emits. Cars with emissions under 100g/km pay nothing at all, between 100-110 £20 a year, 111-120 £30, and then a big jump to 131-140g/km at £110 per year. In total there are 13 bands with the most expensive costing owners of cars emitting more than 255g/km £515 a year.

When these rates were introduced very few cars qualified for the lowest tax bands. But the Government did not count on the pace of change in the motor industry. Often overlooked and not given the credit it deserves, constant innovation has resulted in a situation where today most new cars pay low VED rates or none at all. And as a result the Treasury receives far less revenue from car owners.

The new system seeks to rectify this – virtually all new cars will now be subject to higher charges in their first year, and then most will pay a flat rate of £140 a year. So the vast majority of new car drivers are facing more expense. The rules by the way only apply to cars registered after 1^st April this year – any registered before this date will continue to pay at the current rates.

How does the new road tax system work?

The 13 road tax bands remain under the new system, again differentiated by CO₂ emissions, but as our tables show the rates are very different. Whereas before any car with emissions up to 100g/km paid no tax, now only cars with no CO₂ emissions at all will be exempt.

Effectively that means full-electric or hydrogen vehicles and even then a buyer will have to be careful over how much they pay for their car – all cars costing more than £40,000, no matter what their emissions level, will be served with an extra bill of £310 a year for the first five years. Don’t think you’ll escape the charges by buying a Tesla…

All cars emitting any CO₂ will pay a rate in the first year based on their emissions, and then a standard fee of £140 a year. And all of the first-year charges are higher than the current rate, substantially so for the most polluting vehicles.

For example, so many of the mainstream cars launched in the last few years produce emissions under 120g/km – the average new car emissions rate in 2015 was around this amount. Let’s take an example of Britain’s best-seller, the Ford Fiesta supermini, not the lowest-power version but a 140hp petrol-engined variant with emissions of 104g/km. Under the current system an owner will pay no road tax in year one and then £20 a year. Under the new system it will be £140 in year one, and then £140 a year.

So many manufacturers in recent years have worked to get their emissions levels under the magic £100g/km marker, and the market is today full of models with CO₂ rates of 95-99g/km, paying no road tax. Buy one of these after 1^st April and you are looking at £120 in year one, then £140 a year.

Dirtier but not pricier?

The further one goes up the new tax bands, the more eye-watering the new first-year rates become. At between 171-185g/km the rate is £800, compared to £355 under the previous regime, and for the most polluting plus-255g/km cars it’s a massive £2,000 (ouch!), up from £1,120. But this is not necessarily a good reason not to buy a more polluting car.

Ever fancied a Ford Mustang? And not any Ford Mustang but the proper NASCAR-like version with its 5.0-litre V8 engine? The coupe is currently on sale on the UK market for £36,345. It puts out CO₂ emissions of 299g/km, so under the old system it would cost £1,120 to tax in year one and then £550 a year after. Under the new system the first-year charge will be £2,000, but then £140 a year. By the time you buy your fourth year’s tax, you’ll be saving money and if you keep the car for five years you would have saved £750 compared to the old regime.

This perhaps is an extreme case but so long as you stay below that £40,000 price barrier cars that were previously a bad idea tax wise, because of their emissions, are now not necessarily so. And this is where the most criticism of the new system is being leveled, in that it effectively penalizes the buyers of cleaner cars by a much greater amount than it does dirtier ones.

The best seller in the Mitsubishi range is the Outlander PHEV, because it offers the twin plusses of an SUV that almost everyone seems to want these days, and a clean-plug-in hybrid powertrain with emissions of just 42g/km. Currently owners of these cars pay no VED at all. Under the new system their costs will increase by £140 a year, plus a first-year fee of £10 – over three years a total of £290.

Buy the traditional diesel version of the Outlander, however, with emissions of 139g/km, and the costs will be £200 in year one and then £140 a year – so over three years a total of £480. Under the current system, Outlander diesel owners pay £390 over three years – so come April 1^st the clean PHEV version’s three-year tax bill goes up by £290, the diesel’s by £90…

Meanwhile you could instead look elsewhere in the Mitsubishi model range, to the least clean car in the line-up. The five-door Shogun SUV can be bought with a 3.2-litre engine and auto transmission, and a 245g/km emissions rate. But again, buy a Shogun after 1^st April, and over three years you’ll see a tax bill increase of just £95. Keep it longer and you’ll start saving £360 a year compared to today’s road tax rate – while Outlander PHEV owners, putting almost 100g/km less CO₂ into the environment, will carry on paying £140 more than they do now…

You should also read: What happens to the road tax when you sell your car?