How does car tax work?

Tax is calculated according to how much CO2 a car emits.

There are 13 bands from A to M – cars which emit less CO2 fall into lower bands, and more polluting vehicles are placed in higher bands.

The higher the band, the higher the bill, with cars in band M costing £405 per year to tax. Cars manufactured before 2001 are taxed according to engine size:

• Cars under 1549cc cost £120 per year (£125 from April 2009)
• Cars over 1549cc cost £185 per year (£190 from April 2009 and £205 from 2010)

To find out how much it costs to tax your car, visit our 2009 car tax guide.

What was announced in the 2008 Budget?

Band A stayed tax-free and band B was kept at £35 per year, while bands C to F rose by £5.

Tax band G – the highest band in 2008 – was increased from £300 to £400.

The 13 bands would have seen a maximum price increase of £90, but the Chancellor reduced this to £5 in November 2008’s pre-Budget report.

How much will tax cost in 2010?

Standard rates will rise or fall by a maximum of £30 from April 2010.

But the most notable change will be a new first-year rate – or ‘showroom tax’ – which means new cars will be taxed a different rate in their first year.

Motorists who buy higher polluting vehicles will receive higher tax costs in the first year, and lower-emission vehicles will have reduced fees.

For example new cars bought after April 2010 which emit more than 255g/km of CO2 will cost £950 in the first year – then £435 each year thereafter.

Those which emit less than 130g/km of CO2 will have a tax-free first year.

What do the experts say?

Philip Gomm, head of external communications for the RAC Foundation, said: “The new VED rates should be abolished completely.

“The trouble with upfront costs is the motorist is being taxed for ownership, not for usage. A long-term national road pricing scheme should be set up, which taxes motorists for mileage, not for owning a particular car.

“It’s all well and good for the government to try and cut CO2 emissions, but for many, public transport isn’t an option.”

The Society of Motor Manufacturers and Traders (SMMT) is urging the government to send “buy-now” signals to kick-start demand in the new car market.

The SMMT wanted to see the 2010 first-year tax rate removed or delayed for new cars.

“The UK motor industry is reaching a state of emergency and the rate of government action is crucial to the future success of the sector,” said SMMT chief executive Paul Everitt.

It’s not just motorists who might feel the brunt of a new tax increase either.

View all of the UK's tax-free cars:

The Retail Motor Industry Federation (RMIF) says changes to VED which came into force on January 1, 2009 will have a “negative effect” on car dealer cash flow.

From 1 January 2009, only registered keepers of vehicles may apply for VED refunds. As dealers rarely become the registered keeper they will be unable to obtain a refund, costing the car industry around £70 million per year.

RMIF Chairman Paul Williams said: “The timing of the introduction of the new rules could not be worse. The new VED refund rules will remove a major income stream from dealers when they can least afford it.”

What will happen in the future?

Mr Darling wants CO2 emissions cut by at least 80 per cent by 2015. It’s likely higher polluting vehicles will see another tax increase next year, with greener cars receiving a discount.

However, if the current economic climate doesn’t improve by the end of this year, any tax increases could be deferred in the 2009 pre-Budget report.

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