Why car tax is going up – and how much you face paying

Motorists face paying even more to keep their cars on the road from this month as car tax increases in line with soaring inflation rates.

Chancellor Jeremy Hunt spared motorists a “huge rise in fuel duty in line with inflation in his Spring Budget”, said This is Money, but “he refused to put a freeze” on the cost of Vehicle Excise Duty (VED) – car tax – from 1 April 2023. And with the retail price index (RPI) at 10.1%, that “translates to some major price increases for drivers” of cars, vans and motorcycles, the site added.

Most owners “can expect to be stung” by the changes, with some of the biggest increases hitting those with £40,000-plus petrol, diesel or hybrid vehicles registered in the past five years.

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What is Vehicle Excise Duty?

Car tax is an annual charge that “is a legal requirement for all vehicles registered in the UK“, said the Daily Mirror’s money editor Levi Winchester. The only exception is electric vehicles, which are exempt until 2025.

Motorists who buy a new car pay a first-year “showroom tax rate”, which is based on the vehicle's CO2 emissions. After the first year, a flat standard rate is paid annually.

“The VED rates you have to pay will also be influenced by when your vehicle was registered, meaning when it first went into use,” said The Money Edit.

Before 1 April 2017, a different system was used that was more heavily focused on encouraging drivers to buy cars that emitted as little CO2 as possible. Cars that emitted less than 100g/km of CO2 emissions were not taxed at all and tax costs were very low for cars emitting up to 120g/km too, but far higher charges were applied to cars with higher emissions.

The current VED system applies to cars registered since April 2017 and vastly expanded the number of vehicles eligible for the flat-rate tax, as part of the push to encourage motorists to go fully electric.

If your car was registered before the change, the tax remains governed by the old rules.

How is car tax calculated?

The first-year tax cost can range from £0 to £2,365, “depending on how environmentally-friendly the car is”, said MoneyHelper. The tax rates are split into bands based on how many grams of CO2 a vehicle emits per kilometre driven.

After the first year, the VED charge for petrol and diesel cars registered after 1 April 2017 with a list price under £40,000 is £180 (up from £165 in the 2022-23 financial year). And owners of cars listed for £40,000 or more have to pay an additional £390 annual fee for five years.

So the owner of a petrol or diesel car with a list price of more than £40,000 would pay £570 (£180+£390) for five years from the second time that the vehicle is taxed.

The list price is the published price before any discounts at the first registration. Check the list price with your dealer when purchasing a car to find out how much vehicle tax you’ll have to pay, or check by entering the car’s registration number at Gov.uk.

Under the pre-April 2017 system, said The Money Edit, there was “no special first-year cost”, just the annual rate based on emission levels.

Why are rates rising?

Car tax increases each April in line with inflation, which has soared over the past year.

The latest RPI hike has increased VED for all car buyers except those purchasing fully electric vehicles or plug-in hybrids vehicles that emit less than 50g/km CO2. Buyers of the latest petrol and diesel cars with carbon emissions up to 150g/km can expect to pay between £5 and £60 more than before the latest hike.

And those “buying a new motor with CO2 emission above 150g/km will be forced to pay an extra £60 to £240, with the most polluting models clobbered by a first-year showroom tax rate of £2,605”, said This is Money.

How to cut your car tax costs

“Keeping your VED costs to a minimum will mean opting for vehicles with lower emission levels,” said The Money Edit. Although electric vehicles will no longer be exempt from the first-year charge from 2025, “they will continue to incur lower charges than those that are purely powered by petrol or diesel”.

There is also no tax on cars registered between March 2001 and before 1 April 2017 that produce less than 100g/km of CO2 emissions, and “historic vehicles” that are more than 40 years old are exempt too.

“Some disabled drivers are also exempt from VED, for example those who use a mobility scooter or who receive the disability living allowance mobility component’s higher rate,” the site added.

For the majority of owners who do have to pay car tax, the cost can be minimised by paying the whole lot in one go, because the “government imposes a 5% surcharge if you pay either in two or 12 stages”.

Marc Shoffman is an award-winning freelance journalist, specialising in business, property and personal finance. He has a master’s degree in financial journalism from City University and has previously written for FTAdviser, ThisIsMoney, The Mail on Sunday and MoneyWeek. This article is based on information first published on The Week's sister site, The Money Edit.