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Car tax explained

By Adrian Porter

Vehicle excise duty (VED) is better known as car tax. This guide reveals how much you’ll pay and which cars are exempt.

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Currently, all cars registered after March 2001 are subject to the car tax rates set in 2015. The rates are based on how much carbon dioxide (CO2) your car emits into the atmosphere, and there are different tariffs for alternative fuel cars such as hybrids and those that use biofuels or gas.

The current car tax bands will stay in place until 31 March 2017, after which major changes will take effect.

If you want to buy a car that is exempt from car tax, you will need to buy an electric car, or a low-emission car that was registered before 1 April 2017.

To find the best car for you, check out our Best Buy car reviews.

Current car tax rates: petrol and diesel cars

Petrol and diesel cars registered after 1 March 2001 are currently subject to two different rates of tax. The first-year rate only applies in the first year the car was registered new. The second rate then applies every year after that.

Both first year and subsequent rates are based on the amount of CO2 the car is officially claimed to produce.

The different bands have a letter assigned to them, from A to M. Cars in band A emit the least amount of CO2, and are currently exempt from paying any car tax throughout the life of the car.

The rates below show the price if you choose to make a single payment for the year.

You can choose to set up a direct debit to pay monthly, or pay a single payment every six months. But if you choose either of these options, you will up paying more.

Pre-April 2017 car tax rates explained
Current car tax rates
Car tax band CO2 emissions First year rate Annual rate after first year
A Up to 100 g/km £0 £0
B 101-110 g/km £0 £20
C. 111-120 g/km £0 £30
D 121-130 g/km £0 £110
E 131-140 g/km £130 £130
F 141-150 g/km £145 £145
G 151-165 g/km £185 £185
H 166-175 g/km £300 £210
I 176-185 g/km £355 £230
J 186-200 g/km £500 £270
K 201-225 g/km £650 £295
L 226-255 g/km £885 £500
M. Over 255 g/km £1,120 £515

*Band K includes cars that have a CO2 figure over 225g/km but were registered before 23 March 2006.

These car tax rates only apply to cars registered after 1 March 2001. Cars registered before this date are charged based on their engine size: those with engines smaller than 1549cc will pay £145 a year and others will pay £230 a year.

A rolling 40-year car tax exemption for classic vehicles applies from 1 April 2015. It means any vehicle built 40 or more years ago will be exempt from car tax on an automatic rolling basis on 1 April each year.

Current tax rates: alternative-fuel cars

Alternative-fuel cars are those that do not run purely on diesel or petrol. They can include:

  • Hybrids
  • Plug-in hybrids
  • Electric vehicles
  • Liquefied petroleum gas (LPG) cars
  • Compressed natural gas (CNG) cars
  • Biofuel cars (bioethanol or biodiesel)

The car tax rates for alternative-fuel cars simply cost £10 less than for regular petrol or diesel combustion cars.

Changes for new cars after 1 April 2017

The car tax system is undergoing major changes in 2017. It is important to note that changes will not be backdated, so will only affect cars registered as new on 1 April 2017 or after.

The main changes between the new system and the current one are:

  • a different set of first-year rates, but still based on CO2 emissions
  • a standard rate of £140 applies to all cars after the first year, regardless of CO2 emissions
  • cars over £40,000 pay an extra £310 per year for five years
  • only zero-emission cars (like electric vehicles) are exempt from car tax, as they are now, but are still subject to the £40,000 rule (see below).

The new rates have a lot more bands that the current one:

Car tax rates from April 2017
Car tax rates explained
CO2 emissions First-year rate Standard rate
0 £0 £0
1-50 g/km £10 £140
51-75 g/km £25 £140
76-90 g/km £100 £140
91-100 g/km £120 £140
101-110 g/km £140 £140
111-130 g/km £160 £140
131-150 g/km £200 £140
151-170 g/km £500 £140
171-190 g/km £800 £140
191-225 g/km £1,200 £140
226-255 g/km £1,700 £140
Over 255 g/km £2,000 £140

£40,000 rule

After the first-year rate, owners of cars that cost over £40,000 when new will then have to pay a supplement of £310 per year for five years (so from years two to six of the car’s life).

This £40,000 rule will also apply to zero-emission cars that cost over £40,000. So if you bought a brand new Tesla Model S (an electric car that costs over £40,000), for instance, you will pay £310 per year during the second to sixth year of ownership. That’s £1,550 in total.

Will I be better or worse off under the new system?

To show how the new rules will affect you, below are a selection of cars with CO2 levels ranging from low to high. All cars are for example purposes only and some have greener engines available. All models listed are under £40,000:

Would you be better or worse off under the new system?
Would you be better or worse off under the new system?
Car CO2 emissions Loss/gain after one year Loss/gain after five years Loss/gain after ten years
Toyota Prius (hybrid) 70 g/km -£25 -£585 -£1,285
Ford Mondeo 94 g/km -£120 -£680 -£1,380
Skoda Superb estate 126 g/km -£160 -£280 -£430
Honda Civic Tourer 151 g/km -£320 -£160 +£40
Subaru WRX STI 242 g/km -£830 +570 +£2,320

£2,320The new rules will mean you will pay £2,320 less on environmentally unfriendly cars like the Subaru, yet pay £1,285 more on green cars like the Toyota Prius over a 10-year period.

No more tax discs

Since 1 October 2014 you are no longer required to display a tax disc in the windscreen of your car.

This did not, sadly, mean the end of annual car tax but it does have implications for buying and selling cars.

If you buy a used car: any remaining car tax can no longer be transferred so you need to tax the car before you can use it.  

If you sell a car: you will get an automatic refund for any remaining car tax – provided you have notified the DVLA of the sale.

However, you will only be refunded for any full calendar months remaining. That means if you sell your car one week into the month, both you and the new owner will effectively have to tax it for the remainder of that month.

Company cars

The company car tax rules were changed back in 2002, with tax rates based on a car's CO2 emissions. This means drivers of 'greener' cars pay less 'benefit in kind' (BIK) tax.

Essentially, a car’s CO2 emissions place it in a band, which gives the percentage BIK tax a driver will pay.

Unlike privately owned cars, new vehicles will not be subject to the same flat rate after April 2017. The BIK rates, which are based on CO2 emissions, have been set until 2019-20.

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