VED car tax squeeze: annual bill jumps £140 for cleanest petrol and diesel cars

  • Parkers investigation unearths flaws in 2017 car tax system
  • Many of the cleanest models on sale will see VED costs rise
  • Conversely some gas-guzzlers will enjoy tax reductions
  • Parkers investigation unearths flaws in 2017 car tax system
  • Many of the cleanest models on sale will see VED costs rise
  • Conversely some gas-guzzlers will enjoy tax reductions

Fairness was claimed to be at the heart of the sweeping car tax reforms that former chancellor George Osborne announced in his 2015 Summer Budget for 2017, but the stark reality is somewhat different. A Parkers investigation reveals that almost £270 million of extra revenue in the first year alone will be prised from the pockets of low-CO2 car buyers.

We’ve pored over the small print of the planned changes, which apply to new cars bought from 1 April this year, and cross-matched them with our own Parkers vehicle data to calculate who the winners and losers will be.

If the outgoing Vehicle Excise Duty (VED) system remained in place it would generate £3.79 billion in taxation by April 2023. We estimate that by the same date the new car tax arrangement will have boosted that figure to £8.94 billion.

Of that additional £5.15 billion collected for the Treasury’s coffers, a whopping £4.69 billion will come from buyers of lower-emission cars producing 1-130g/km of CO2.

Our findings suggest that government policy will hit the very owners who are lapping up cleaner petrol and diesel cars, while some buyers of higher-polluting vehicles will in fact see their road tax drop.

How Britain’s new VED road tax system works

At first glance, 2017’s new taxation rules look like an update of the previous scheme, albeit with new bands created and others amalgamated.

Only buyers of new electric and hydrogen-fuelled cars with zero CO2 emissions will escape road tax under the new system; under the old rules any car producing less than 100g/km is eligible for free VED. Anything producing even 1g/km of CO2 will pay a higher First Year Rate from April this year.

Instead of a CO2-based rising scale for the Standard Rate – the car tax payable from year two onwards – 2017’s streamlined model sees all cars pay a flat £140 fee, with only zero-emission cars remaining exempt.

And buyers of more expensive cars will see their tax bills increase further still, as anything with a list price of £40,000 or more will have to pay an additional £310 of annual duty for years two to six, irrespective of CO2 emissions.

Which cars are the biggest losers under the new VED system?

Former chancellor Osborne said he had to reform motoring tax – and his replacement, Philip Hammond, hasn’t proposed any amendments since taking over last July.

Because cars are becoming so much cleaner according to the official emissions figures by which cars are taxed, Osborne forecast that by the end of this year three-quarters of new cars sold would be free to tax. This explains why the outgoing 0-100g/km CO2 band is being split into five new categories.

Parkers data suggests that 64% of 2016’s model derivatives, which currently cost nothing under the First Year Rate, will be hit by the new system’s increase. This is reinforced by the sales figures from the Society of Motor Manufacturers and Traders (SMMT): of the 2,633,503 cars sold in 2015, 1,884,614 (71.6%) emit between 1-130g/km of CO2.

Parkers has gauged the types of vehicles which will benefit – and those likely to be penalised – over the next six years.

The cars set to be clobbered by the taxman

1. Volvo XC90

Plug-in hybrids have grown in popularity in recent years, particularly in the premium echelons of the market as customers seek to reduce tax bills and fuel costs. Volvo’s XC90 T8 is a prime example of an upmarket, seven-seater SUV quoted at just 49g/km. Until the end of March it will cost nothing to tax annually but, due to its list price being over £40,000, buyers from April onwards will have to stump up £2,260 to tax it for the first six years.

2. Tesla Model S

Even the hitherto VED-free fully electric Tesla Model S will face a levy of £1,550 spread across years two to six – again because of its asking price rather than its emissions.

3. Jaguar XE, XF, and F-Pace, Land Rover Discovery Sport, and Range Rover Evoque

There are several derivatives of popular Jaguar XEXF and F-Pace, as well as the Land Rover Discovery Sport and Range Rover Evoque that have a list price below £40,000, but will go over that price point when a number of extra-cost options have been added. It is likely that many Brits will forego the higher-spec models to avoid tipping over the £40,000 threshold and its £1,550 of additional VED road tax.

Most alarming is that of the estimated £5.15 billion of extra VED revenue under the new system, 91.2% would be generated by additional taxation imposed on buyers of cars emitting 1-130g/km. Proof that drivers of the cleanest models are the ones who’ll foot the largest slice of the tax rise.

Echoing Parkers in expressing concern about the new regulations, the AA suggests that the incentive to buy a new low-CO2 car that isn’t electric will be lost come April.

Edmund King, AA president, said: “The government impact assessment predicts a surge of sales of 0-120g/km cars prior to the new VED start date. In the new system, only pure electric or hydrogen fuel cell cars could qualify for the lowest band. We believe the current system could have been reviewed to give more incentives for those that opt for lower-emission vehicles.” 

Does anyone benefit from 2017’s VED changes?

While cars emitting 255g/km of CO2 or more rightly appear to be hit the hardest with a First Year Rate increase of £900, taking them to £2,000, that only reveals part of the story, because it’s the Standard Rate where the system’s inherent unfairness is confirmed.

Take the Ford Mustang GT Fastback, complete with its 5.0-litre V8 engine producing 421hp as well as 299g/km of CO2. Even though the First Year Rate is almost twice as expensive under the 2017 regulations, that bill’s outweighed by the much lower Standard Rate of £140 a year, down from £515.

Because the Mustang’s list price is sub-£40,000 there’s no additional penalty, meaning over the first six years Ford’s muscle car will cost £925 less in VED taxation under the new system.

It’s not alone: buyers of similarly-polluting Nissan 370ZSubaru WRX STI and the soon-to-be-discontinued Vauxhall Insignia VXR SuperSport models would all be better off under the 2017 road tax proposals.

Parkers has identified further inconsistencies in the system, all of which benefit buyers of cars with higher emissions rather than those at the greener end of the VED spectrum.

Select a sub-£40,000 car emitting 186-190g/km of CO2 and over six years you’ll save £315 in VED while a buyer of a car in the 176-185g/km band will pay £25 more under the new arrangement. It hardly seems fair to Britain’s beleaguered motorists.

Parkers calculates that the Treasury could lose in the region of £23 million in the first year, simply from these quirks of reduced Standard Rate charges: while cars in the 1-130g/km bracket should generate an additional £199 million of VED, we estimate that the ‘dirty-car discount’ reduces the overall tax take to £176 million.

The Treasury was unable to provide a response about why buyers of lower-emissions cars are set to be penalised severely, while the highest-polluting effectively receive a tax break.

What happens next?

The government is clearly at the mercy of changing customer demands and the pace of technological development, reducing tax income. What remains to be seen over the coming months and years is whether even more customers decide to switch to a zero-emissions vehicle after April this year – increasing demand for hydrogen fuel-cell cars such as the Toyota Mirai, as well as more established electric cars.

Similarly, there’s scope for less expensive plug-in hybrid derivatives from a variety of manufacturers as buyers’ consciences make them demand cleaner cars that won’t clean out their bank accounts.

Parkers acknowledges that elevating taxation to invest significantly into Britain’s crumbling and under-pressure road network is desirable, but penalising buyers of less-polluting cars while reducing the tax burden on the worst-offending vehicles is unjust.

Our investigation also brings the government’s environmental credentials into question. Many of the underlying principles of the new car tax system fly in the face of the next wave of EU emissions regulations, which require manufacturers’ average CO2 output across the range to drop to 95g/km, although whether Britain continues with these rules post-Brexit remains to be seen.

The only sure-fire way of avoiding paying tax is to pick a zero-emissions electric car, but many still find the range anxiety and cost of battery cars off-putting.

Forcing customers to pay more than they currently do as cars become less polluting doesn’t seem fair to us. Be sure to join the debate on Parkers’ Facebook page.

Sources:

Model derivative data – CAP and Parkers

2015 car sales data – SMMT

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