Vehicle Excise Duty (VED), commonly known as road tax, is set to undergo significant changes in the coming years, impacting car owners across the UK. These changes are primarily designed to align tax rates with environmental policies, such as encouraging the use of electric vehicles (EVs) and reducing emissions. Here, we’ll break down the latest developments in VED, including updates from the recent Autumn Budget and new rules affecting electric vehicles, premium cars, and hybrid vehicles.
Overview of Vehicle Excise Duty (VED)
VED is a tax that drivers in the UK must pay for using their vehicles on public roads. It’s typically calculated based on factors like CO2 emissions, car value, and fuel type. Over the years, the government has tweaked these rates to push for environmental change, favoring electric and lower-emission vehicles, while penalizing higher-emission cars.
Key Changes in the Autumn Budget 2024
On 30 October 2024, the Chancellor of the Exchequer, Rachel Reeves, announced several new measures related to Vehicle Excise Duty, which will take effect starting in April 2025. The changes reflect the government’s commitment to reducing carbon emissions while also addressing the anticipated shortfall in VED revenues due to the growing popularity of electric cars.
First-Year VED Changes for New Cars: From April 2025, the first-year road tax rates for new vehicles will see significant increases, particularly for cars emitting more than 75g/km of CO2. For example, a car emitting 76 to 90g/km CO2 will face a first-year charge of £270, up from £190. However, zero-emission vehicles (EVs) will continue to benefit from the lowest first-year rate at just £10.
Standard VED Rates: The standard VED rate, which applies after the first year, will rise in line with the Retail Price Index (RPI) inflation starting from April 2025. For most cars, this rate will increase to £195, up from the current £190. This is part of an ongoing effort to adjust for inflation and ensure that VED remains a substantial revenue source for the government.
Premium Car Supplement: From 1 April 2024, vehicles with a list price above £40,000 will incur an additional premium tax rate. These vehicles will face an extra £410 annually on top of the standard VED. For electric vehicles in this price range, the additional charge will be £0, but this could change after 2025, as EVs will no longer be exempt from the premium tax.
Electric Vehicles and the Road to Change
Until recently, electric vehicles have enjoyed a major benefit in the form of exemption from Vehicle Excise Duty. However, this situation will change from April 2025. While electric vehicles (EVs) will continue to have a much lower tax burden compared to traditional petrol and diesel cars, they will no longer be exempt from the standard rate of VED. This is due to the increasing number of EVs on the roads, which has prompted the government to reconsider this exemption.
EVs from April 2025: The standard VED for electric cars will rise to £195, the same as for most other cars. While this might seem like a disadvantage for those considering an EV, it’s important to note that EVs will still be among the most tax-efficient vehicles on the road, especially when compared to high-emission petrol and diesel alternatives.
First-Year EV Tax: EVs will continue to pay a minimal first-year VED of £10, a figure that remains unchanged until 2029. This is part of the government’s strategy to maintain the incentives for purchasing electric cars as they continue to phase out petrol and diesel vehicles.
The Impact of Emissions on VED Rates
One of the most significant factors in determining VED rates is a vehicle’s CO2 emissions. The more CO2 a car emits, the higher the BED. As the UK pushes towards decarbonization, the new VED rates for 2025 will see a sharp increase for high-emission vehicles. The revised first-year VED rates will hit vehicles emitting over 255 g/km CO2 with charges of up to £5,490, which represents a major leap from previous rates.
What This Means for Hybrid and Low-Emission Cars: Vehicles that fall into the 1g/km to 50g/km CO2 emission category (including hybrids) will face an increase in first-year VED rates to £110. Similarly, cars emitting between 51g/km and 75g/km CO2 will see their first-year charges rise to £130. This adjustment reflects the increasing environmental scrutiny of hybrid vehicles, which although more efficient than their petrol or diesel counterparts, still contribute to emissions.
Premium Cars and the Tax Implications
Cars with a list price above £40,000 have always faced additional charges under the Premium Car Supplement. From April 2024, this extra charge will continue for these vehicles, with the tax burden for a petrol or diesel premium vehicle rising to £600 annually, while electric premium cars will face a £0 additional charge. However, after 2025, electric premium cars will no longer benefit from this exemption. This move could affect the affordability of luxury electric vehicles like high-end Teslas and Audi e-tron models, as they will see an increase in their tax liabilities.
The Debate Over Road Pricing
One of the most hotly debated topics in recent years has been the introduction of road pricing, which would see drivers charged based on their use of busy roads, particularly motorways. While this idea has been discussed, it is not likely to replace VED any time soon. The government is still focusing on ensuring that the VED system remains effective as more drivers make the switch to electric vehicles, which currently pay no road tax.
In the future, road pricing could be implemented as a supplement to VED, potentially charging higher fees for vehicles based on their emissions or time of use. However, any such changes would require significant investment in infrastructure, such as cameras and sensors on the road network, which could make it a costly and complex endeavor.
What Does This Mean for the Future of Vehicle Taxation?
As we approach 2025, the landscape of Vehicle Excise Duty is undergoing a fundamental shift. With more people opting for electric and hybrid vehicles, the government’s reliance on VED to generate revenue is becoming less certain. The changes announced in the 2024 Autumn Budget reflect a broader push to ensure that road tax continues to contribute effectively to government coffers while incentivizing the use of lower-emission vehicles.
For consumers, the key takeaway is that while VED will remain largely predictable for many standard vehicles, those with higher emissions or luxury models will face significantly higher charges in the coming years. Electric vehicle owners, while still benefiting from preferential rates, should prepare for a modest increase in VED costs from 2025 onwards.
FAQs
What is Vehicle Excise Duty (VED)?
Vehicle Excise Duty (VED), also known as road tax or car tax, is a government charge applied to vehicles driven or parked on public roads. The amount depends on the vehicle’s CO2 emissions, engine size, and fuel type. It helps fund road infrastructure and maintenance.
What are the changes to VED announced in the Autumn Budget of 2024?
The 2024 Autumn Budget introduced significant changes to VED, primarily affecting new cars from April 2025. The most notable changes include a sharp rise in the first-year VED rates for petrol, diesel, and hybrid vehicles, with rates for some CO2-emitting cars set to increase tenfold. Specifically, first-year rates for vehicles emitting between 1-50g/km CO2 will rise from £10 (or £0 for hybrids) to £110.
Why are the VED rates increasing?
The government’s decision to increase VED for some vehicles is part of an effort to encourage the adoption of cleaner, zero-emission vehicles. The higher charges for petrol, diesel, and hybrid cars are designed to create a bigger financial incentive to switch to electric vehicles.
What is the impact of the new VED rates on hybrid and electric car owners?
While electric vehicle (EV) owners will continue to benefit from lower tax rates, hybrids will see a substantial increase in first-year rates. For instance, cars emitting between 51-75g/km CO2 will see an increase from £30 to £135. The changes will particularly affect hybrid owners who were previously paying lower rates than conventional petrol or diesel cars.
In Summary
The changes to Vehicle Excise Duty set for 2025 are significant and will affect a wide range of vehicle owners, from those driving electric cars to owners of high-emission vehicles. While the government is still focused on reducing carbon emissions and promoting cleaner transportation, car owners should stay informed about how these new VED rates might impact them. As the UK moves towards its decarbonization goals, it’s clear that Vehicle Excise Duty will play a critical role in shaping the future of road taxation and vehicle ownership in the country.
To read more, Click Here.
