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First published: 15th September 2016

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How will the 2017 Vehicle Excise Duty system for new cars work?

The new system will replace the current one for all new cars registered after April 1 2017, and it will result in higher running costs for some models.

First published: 15th September 2016
  • New system of Vehicle Excise Duty from April 2017 for new cars
  • First-year rates depend on CO2 output; zero-emission cars are free to tax
  • All cars registered before April 1 2017 remain in the current, unchanged system
A new system of Vehicle Excise Duty (VED) comes into force next year, and will apply to all new cars registered from April 1 2017.

Anyone thinking of buying a car in the next six months should take note, because it will result in a major increase in running costs for some models.
What is Vehicle Excise Duty?
Vehicle Excise Duty, or VED, is also known as vehicle tax, car tax, and road tax. It’s a tax which must be paid for most vehicles which will be used or parked on public roads in the UK. The current system of excise duty applying to motor vehicle was introduced all the way back in 1920.

There’s a new system on the way that will apply from next year.
What will the new system mean for me?
In common with the current system, the new regime consists of a unique first-year rate followed by a different charge in subsequent years. However, under the new system, the first-year rate of tax depends on the car’s carbon dioxide emissions – the higher the emissions, the higher the tax, with costs running from £0 for zero-emission cars, to £2,000 for models with emissions of more than 255g/km.

After that first payment, almost all cars will be subject to a flat rate of £140 per year. The exceptions are zero-emission cars, which will pay nothing, and all cars with a list price of more than £40,000, which will be subject to a £310 supplement for five years, regardless of their emissions.
Why are these changes taking place?
The government says the changes address unfairness in the current system, as reductions in the average CO2 emissions of cars mean that owners of newer cars are paying less than owners of older cars. It also says the supplement on cars of more than £40,000 will ensure that those who can afford the most expensive cars make a fair contribution.
Are any cars exempt from the new system?
As before, the changes clearly incentivise the purchase of zero-emission cars, such as the all-electric Nissan Leaf and Renault Zoe, and hydrogen-powered Toyota Mirai. All these will continue to pay zero road tax throughout their life.
What about cars that will have big tax increases?
The changes will result in some models seeing big jumps in their running costs – particularly cars with low emissions.

For example, under the current system, the Volvo XC90 T8 (a plug-in hybrid with emissions of less than 50g/km) pays no VED. Under the new system, the £10 first-year rate will be followed by annual bills of £450 (the flat rate of £140, plus the £310 supplement for cars with a list price of more than £40,000) for five years.

Similarly, even the zero-emission, all-electric Tesla Model S will see its running costs jump after April next year. This is because, although the car’s emissions mean it is exempt from VED, its list price means it is subject to the £310 annual supplement.

Cheaper low-emission cars will suffer, too. For example, any car with CO2 emission of less than 100g/km currently pays no VED, but under the new system, a car with emissions between 91 and 100g/km will pay £120 in its first year, followed by £140 each year after that.
Will all cars see costs rise?
No. Some cars will see almost no penalty under the new system. The high-performance Audi TTS, for example, has CO2 emissions of 168g/km and a list price just under £40,000. Under the current system, its VED costs £300 in the first year, followed by annual bills of £210. Under the new system, the first year bill is higher – at £500 – but as this is followed by annual bills of £140, it only takes three more years for the overall VED bill to be lower.
So the new system only applies to new cars registered after April 1 2017?
Yes, and it’s important to note that. Any cars registered before then will remain subject to the existing system, which continues as before.
What about company car tax?
There are no changes planned for the company car tax system, which continues to incentivise cars with low CO2 emissions. However, it’s yet to be seen if the change in running costs will be reflected in the all-important contract hire rates.
How will this affect car buying?
Well, in the run-up to the introduction of the new system, there could be a rush to buy cars that will suffer after it comes into force. After all, a car that you bought on March 1 2017, with an annual VED bill of nothing, could cost hundreds more to run each year simply by virtue of it being registered a month later.

Buyers should also think very carefully before choosing options on a car that will be registered after April next year. The rate of VED is calculated on the list price of a car, and that means the price including any options you specify. There’s a risk that going a bit overboard with options on a £39,000 car could send its price over £40,000, and therefore incur the £310 supplement.
Used car buyers do need to watch out though…
The new system will mean that used car buyers need to shop carefully in the future, as the date a car is registered could have an important effect on its value. A car registered on March 1 2017 could cost less to run than an identical car registered a month later, making the older car more valuable.
For full details of the costs of the new VED system, see the HM Revenue and Customs website.