Wondering how the new Vehicle Excise Duty (VED), informally known as ‘road tax’, unveiled in today’s Summer Budget 2015 will work when it’s introduced in 2017?  We have the details.

New cars registered on or after 1st April 2017 will pay VED according to a new system.

First year rates will vary depending on the CO2 emissions of the vehicle, just as they do now, although the bands will be reorganised and the rates ratcheted up dramatically, with some cars paying up to £2,000.  The table below gives the full rates.

Remember that these rates are built-in to the sticker price of a new car.

For each subsequent year, i.e. when you come to renew your road tax for the first time and each year thereafter, every car except a zero emissions vehicle will pay a flat rate of £140 a year.

However, cars with a list price of over £40,000 will pay a supplement of £310 per year on top of the standard rate, and they’ll do so for five years.

CO2 emissions (g/km)First year rateStandard rateSupplement for cars
111 -130£160£140£310
Over 255£2000£140£310

So, an entry-level BMW X5 with a list price of £44,280 and CO2 emissions of 139 g/km will pay £200 VED in its first year, but £450 a year for five years after that, before reverting to £140 a year in the sixth year.

Similarly, something like a new diesel Honda CR-V with a list price of £27,570 and CO2 emissions of 139 g/km will pay £200 in its first year, but just £140 a year thereafter.

By contrast, a car with zero emissions such as a Tesla Model S, will continue to pay no road tax to start with, although the Tesla will now need to pay the £310 ‘premium car’ supplement for five years since it costs more than £40,000.

Compare that to the sub-£40k but CO2-heavy V8 Ford Mustang which will have to pay £2,000 in its first year, but only £140 for each subsequent year.  The Mustang makes an interesting case study in itself, as it highlights one of many peculiarities in the proposed new system.  Buy a new Mustang GT today and the window sticker will include £1,100 of first-year road tax, plus you’ll pay £505 a year after that.  However, if you wait until April 2017 you’ll pay £900 more for the car, but will only have to pay £140 for each subsequent year – keep the car for four years, and you’ll pay less overall.

The losers under the new system are likely to be expensive hybrid cars: from 2017, cars like the Volvo XC90 Twin Engine, a petrol/plug-in hybrid, will pay only £10 in their first year, but £450 a year for the next five, before reverting to £140 a year thereafter.

The government hasn’t clarified what they consider to be a vehicle’s list price – is it the base price of the car, or does it include the cost of any options or discounts?  It may be that cars close to the £40,000 cut-off will require either careful selection of optional extras, or some judicious bargaining with your salesman to avoid having to pay £1,550 (five lots of £310) in extra tax.

Update: the DVLA says the VED supplement will be levied based on the list price before discounts.  We assume that to mean the published list price of a standard vehicle before options.

The Chancellor outlined these changes as a way to ensure the VED system remained sustainable.  With many new vehicles now falling into low emissions tax brackets, the tax take by the government has been falling.

To sweeten the deal, however, the Chancellor also announced plans to create a new Roads Fund in 2020-21 that will see all revenue raised from VED allocated back into construction and maintenance of the road network.

Road tax for all existing cars, and anything registered before 1st April 2017, will remain unchanged.