UK Tax Essentials

Road Tax

Road tax in the UK and how to reduce the amount you pay

A Guide To Direct And Indirect Taxation In The UK – How To Save Money
Chapter Twelve

Story Highlights:

In this chapter we turn our attention to road tax or VED (Vehicle Excise Duty) with information about:

  • The history of VED
  • Changes in Vehicle Excise Duty
  • Exemptions from Vehicle Excise Duty
  • Road tax for the disabled
  • Taxing your vehicle and how to pay road tax
  • How to cancel road tax and refunds of VED
  • How to reduce your road tax
  • The future of road tax revenue

Car Tax

The history of VED or UK Car Tax

Often misleadingly called a ‘Road Tax’ or referred to as ‘Car Tax’, Vehicle Excise Duty (VED) is in reality a tax on owning a vehicle rather than a tax to pay for the use of public roads in the UK. Many motorists complain about the car tax rates they have to pay compared to the state of the roads but revenue from this road tax hasn’t been ring-fenced (and therefore only used for road maintenance) for 80 years. We’ll look at the development of the car tax to understand the changes in its administration and collection and what factors can increase or decrease the price of your road tax giving information up to the most recent changes in April 2017.



We’ll also consider which vehicles are exempt from paying road tax and which groups are also entitled to a car tax reduction. You’ll find guidance on how to pay your road tax including payment methods and suggestions on how to reduce the amount you pay. Finally, we look to the future – what other changes have been suggested to collect vehicle tax revenue from motorists and would they be accepted in the UK?

Early road tax (1870-1936)

The Tramways Act of 1870 meant that the construction of roads and any infrastructure came from local ratepayers and tram companies rather than from vehicle tax. During the period 1896-1936, the road network in the UK only grew by 4% and most was funded by local authorities rather than by vehicle tax.

The Roads & Finance Act of 1920 required councils to register all vehicles, allocate a separate number to each and provide a way to collect all vehicle tax duties.

The Motor Car Act of 1903 introduced a £1 registration fee for each vehicle, which were already subject to carriage duty if they weren’t used solely for trade. This carriage duty – to carry passengers – was £2 2s for cars of up to 1 ton. Later the 1909-10 Finance Act applied a gradual taxation system based on horsepower.

The Roads & Finance Act of 1920 required councils to register all vehicles, allocate a separate number to each and provide a way to collect all excise duties. To make this easier, displaying a tax disc on the windscreen became compulsory in 1921. The Road Fund was established in the same year and the Ministry of Transport was responsible for collecting and spending the money. This Road Fund Licence was paid directly into the Fund and was ring-fenced for road construction until 1937.

Vehicle Tax since 1937

The Finance Act of 1936 saw the Road Fund abolished and vehicle taxation was henceforth treated as general taxation and the revenue was taken over by the Treasury. This meant that there was no longer a direct link between vehicle tax and public expenditure on roads. In the Post-War period, ownership of private vehicles increased dramatically. From 1950-1961 car tax revenue had jumped from £131 million to £730 million. By 1966 this revenue had reached £1 billion.

As part of an incentive to encourage motorists to purchase vehicles with lower CO2 emissions, from 2005 the VED or road tax was charged according to cars’ CO2 rating. In October 2014 the display of the tax disc was abolished since new technology such as number-plate recognition cameras allowed the authorities to check electronically whether car tax had been paid.

An old Rolls Royce being driven, a car which would have been subject to the Finance Act of 1909-10 and taxed based on its horsepower

April 2017 saw a big shake-up in the way car tax is calculated as it was felt that under the old system many new car owners paid insignificant sums in their vehicle tax and that this was a source of untapped tax revenue. In order to understand the changes, let’s look at how much road tax is for cars registered in different years.

Summary:

Early roads and infrastructure were paid by local ratepayers and excise duties on motoring were ring-fenced for road construction until 1937.

Increases in the number of private vehicles in the 1950s and 1960s led to DVLA vehicle tax revenue increasing by over sevenfold.

In 2005 vehicles began to be taxed by their CO2 rating and 9 years later, displaying a tax disc was no longer necessary.

Changes were made in 2017 to the way VED was calculated for new car owners to increase car tax revenue.

Changes in Vehicle Tax

Vehicle Tax rates in the UK now depend on when your vehicle was registered so a number of different bands are now in use. The changes from April 2017 will only affect cars which are registered after this date. Let’s take vehicles in chronological order.

Cars registered in 1960-77 must have a valid MOT but are exempt from VED

Historic or classic vehicles (before 1977)

If your car was first registered before January 1960, then you don’t need to have a MOT or pay Vehicle Tax. You can apply to DVLA for exemption by putting it in the ‘historic tax class’.

Vehicles registered 1977- March 2001

The road tax rates for cars registered between 1977 and 2001 depend on their engine size. The payments are £150 for a car which is under 1549cc and £245 for vehicles which are over 1549cc. There are different rates for motorcycles depending on their engine size and they increase gradually from £18 for motorbikes under 150cc to £85 for 600cc and over.

Vehicles registered March 2001-March 2017

The road tax rates for vehicles registered between 2001-2017 depend on the fuel type and the vehicle’s CO2 emissions. Given as a measurement of how many grams of CO2 the vehicle emits for every kilometre of driving, your vehicle’s CO2 emissions can be found on its V5C registration certificate or details can be found online.

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Vehicles are divided into Bands A to M with Band A having the lowest CO2 emissions (up to 100g per km) and Band M having the highest (over 255g per km). Vehicles in Band A are exempt from paying VED whilst there is a gradual scale of payments up to the most expensive, Band M which costs £535 for petrol- or diesel-driven vehicles, with a £10 annual reduction for cars using alternative fuels. Generally vehicles have to reach Band D (121-130g/km) before there is a significant increase in the annual road tax.

Vehicle tax rule changes from April 2017

For cars and some motorhomes registered on or after April 2017, new rules apply for payments of road tax. The rates are based on its CO2 emissions the first year of its registration and vehicles pay a one-off flat rate VED of £140 a year. In the second year 2 flat rates apply according to CO2 emissions (with a £10 reduction across the board for alternative fuels.)

For cars and some motorhomes registered on or after April 2017, new rules apply for payments of road tax, based on CO2 emissions.

Motorhomes are included if it’s in the M1SP category (you could check with your dealer if you aren’t sure) and its CO2 emissions are included on its ‘type approval certificate’ (also known as a ‘certificate of conformity’ or ‘individual vehicle approval’.)

There’s also an annual supplement of £310, which must be paid for 5 years from the second year of registration for vehicles which have a ‘list price’ (the vehicle’s price before discounts) of over £40,000. Visit the government website for more details of VED rates. In the old system, low-emission petrol and diesel cars were tax-exempt but now it’s only free for vehicles with no tail-pipe emissions such as electric or hydrogen vehicles.

Questions:

How much does vehicle tax generate in tax revenue?

According to projected figures for 2016-17 from the IFS, Vehicle Excise Duty raised £5.5 billion, which makes up 0.8% of total state revenue.

How many people pay their road tax?

According to the DVLA (2013), 99% of motorists pay their road tax on time.

Why were changes made to vehicle taxation rates in April 2017?

Road tax was changed since it was felt that new car owners didn’t pay their fair share of road tax. For example, a quarter of cars registered in 2016 didn’t pay any tax at all as they fell into DVLA car tax Band A (under 100g/km of CO2 emissions).

What effects will the new taxation rules have for motorists?

In general, new car owners will find they have significant increases in their road tax, with fewer exemptions.

Exemptions from Vehicle Excise Duty

Apart from vehicles which fall into the historic/classic category (registered before 1st January1977), do you know which other vehicles are exempt from paying road tax?

A picture of a tractor, which as an agricultural vehicle is exempt from paying road tax

All steam-powered vehicles as well as vehicles used for agriculture, forestry and horticulture (including tractors and mowing machines) are all exempt from paying road tax. Electric vehicles must have their power coming from an external source or have an electric storage battery which isn’t connected to any source of power when the vehicle is moving to be exempt from paying a road fund licence.

Owners of mobile scooters, powered wheelchairs and invalid carriages don’t have to pay road tax either on condition that they reach a maximum speed of 8mph on the roads and are fitted with a device limiting them to 4mph on footpaths. Even if your vehicle is exempt from paying road tax, you still have to apply to allow the DVLA to keep updated records.

Car Tax Rate Summary:

Historic cars (registered before January 1977) pay no road tax whilst vehicles registered between 1977 and March 2001 are taxed according to their engine size.

Vehicles registered between March 2001-17 are taxed in Bands according to their fuel type and CO2 emissions.

Newly-registered cars from April 2017 will be taxed in a different way according to CO2 emissions, fuel type and their list price.

Some types of vehicle such as electric vehicles or powered wheelchairs are exempt from paying road tax on certain conditions.

Road tax for disabled people – 100% reduction

You are entitled to a 100% exemption on your road tax if you receive the higher rate mobility component of the DLA (Disabled Living Allowance) or the enhanced rate of the mobility component of the PIP (Personal Independence Payment). Recipients of a War Pensioner’s Mobility Supplement or an Armed Forces Independence Payment are also exempt from paying VED. However, you’re only eligible if the vehicle is registered in the disabled person’s name or in the name of their nominated driver. Another condition is that the vehicle can only be used for the needs of the disabled person and not for the personal use of the nominated driver.

Recipients of a War Pensioner’s Mobility Supplement or an Armed Forces Independence Payment are exempt from paying VED.

You’re only allowed to have one vehicle with tax exemption at any one time and the first time, the claim must be made at the Post Office when you apply for your vehicle tax (and every time you change vehicles).

Road tax for the disabled – 50% reduction

You can have your vehicle’s road tax halved if you’re entitled to the PIP standard rate mobility component (although not for the DLA lower rate mobility component). To claim your 50% reduction, you must send some documents to the DVLA to proof your eligibility. You need to send a letter or statement from the Department for Work & Pensions showing your PIP mobility rate and the dates you’ve been receiving it, your vehicle logbook (V5C), a V10 form, the original MOT (or GVT certificate if your vehicle needs one) and a cheque made out to DVLA, Swansea for 50% rate of your vehicle tax.

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If you’ve just bought your vehicle and it isn’t registered in your name yet, you can download and complete form V62 and include the V5C/2 new keeper supplement with your application. All documents should be sent by post to the DVLA, Swansea, SA99 1DZ.

Taxing your vehicle at DVLA and methods of payment

To tax your vehicle, you need a reference number. This can be found on a recent reminder (V11) or ‘last chance’ warning letter from the DVLA, from the vehicle logbook V5C (which must be in your name) or from the green ‘new keeper’s details’ slip (V5C/2) from the logbook if you’ve just bought it. VED can be paid by Direct Debit – to set up this method of payment, you need the bank or building society account details and the VC5 or V5C/2. If you don’t have one, you’ll need to apply for a new logbook. You might also need your MOT test certificate, which should be valid when the tax starts. In Northern Ireland, you’ll also require an insurance certificate or cover note.

An picture of a man paying road tax on his phone with his credit card

Road tax can also be paid by debit or credit card or through the Post Office. Payments can be paid as an annual lump sum, in two instalments or spread over the year as monthly payments. For further information, the DVLA Vehicle Tax Service has a 24-hour helpline on 0300 123 4321.

How Much Is Road Tax?

A common question for both new and experienced motorists is how much is road tax? This depends on the age of your vehicle as described above and also the size of the engine, the emissions and whether you are entitled to any road tax discounts.

DVLA Road Tax – Initial Registration

Road Tax Rates For Vehicles Registered After 1st April 2017

The table below illustrates the annual road tax rate when you first register your vehicle. Subsequent vehicle tax rates are displayed in the following table.

CO2 emissions (g/km) Diesel cars (TC49) that meet the RDE2 standard and petrol cars (TC48) All other diesel cars (TC49) Alternative fuel cars (TC59)
0 £0 £0 £0
1 – 50 £10 £25 £0
51 – 75 £25 £105 £15
76 – 90 £105 £125 £95
91 – 100 £125 £145 £115
101 – 110 £145 £165 £135
111 – 130 £165 £205 £155
131 – 150 £205 £515 £195
151 – 170 £515 £830 £505
171 – 190 £830 £1,240 £820
191 – 225 £1,240 £1,760 £1,230
226 – 255 £1,760 £2,070 £1,750
Over 255 £2,070 £2,070 £2,060

DVLA Road Tax – Subsequent Payments

DVLA Road Tax Rates For Cars Registered After 1st April 2017

If you would like to find out how much road tax costs once you have made your initial registration payment, look at the table below. This displayed the cost of car tax for all subsequent payments:

Fuel type Single 12 month payment Single 12 month payment by Direct Debit Total of 12 monthly payments by Direct Debit Single 6 month payment Single 6 month payment by Direct Debit
Petrol or diesel £140 £140 £147 £77 £73.50
Electric £0 N/A N/A £0 N/A
Alternative £130 £130 £136.50 £71.50 £68.25

DVLA Car Tax Fees

Road Tax For Vehicles Registered 1st March 2001 – 31st March 2017

Band CO2 emission (g/km) Single 12 month payment Single 12 month payment by Direct Debit Total of 12 monthly instalments by Direct Debit Single 6 month payment Single 6 month payment by Direct Debit
A Up to 100 £0 £0 N/A N/A N/A
B 101-110 £20 £20 £21 N/A N/A
C 111-120 £30 £30 £31.50 N/A N/A
D 121-130 £120 £120 £126 £66 £63
E 131-140 £140 £140 £147 £77 £73.50
F 141-150 £155 £155 £162.75 £85.25 £81.38
G 151-165 £195 £195 £204.75 £107.25 £102.38
H 166-175 £230 £230 £241.50 £126.50 £120.75
I 176-185 £250 £250 £262.50 £137.50 £131.25
J 186-200 £290 £290 £304.50 £159.50 £152.25
K* 201-225 £315 £315 £330.75 £173.25 £165.38
L 226-255 £540 £540 £567 £297 £283.50
M Over 255 £555 £555 £582.75 £305.25 £291.38

How To Cancel Road Tax

Road Tax Refund

When you purchase a second-hand vehicle, the road tax and SORN (Statutory Off Road Notification) isn’t transferred to the new owner. If you sell a car and there is car tax paid on it, then you’re entitled to a road tax refund (of the VED remaining on it) from the beginning of the month following its sale. You’re also eligible for a road tax refund if you apply for a SORN. However, the vehicle must be kept off the road.

Apart from when you apply for a SORN or the car is sold and/or changes ownership, you are also entitled to a road tax refund when it’s scrapped at an authorised treatment facility, exported or the vehicle is changed or modified so it is road tax-exempt.

Summary:

In certain circumstances, disabled people are entitled to a 100% reduction in road tax as long as the vehicle is used exclusively for their needs.

Some disabled people are eligible for a 50% road tax refund but must provide proof.

There are a number of different payment methods for VED and the tax can be paid as a lump sum, twice a year or every month.

You’re entitled to a road tax refund if the vehicle is sold, scrapped, modified to make it tax-exempt, exported or if you apply for a SORN.

How to reduce your road tax

There are a number of ways you could reduce the VED which you pay for your vehicle. The first is to check your vehicle and see if you are entitled to any reductions in the price of road tax because of its age, its fuel or because of your individual personal circumstances. You could measure its CO2 emissions to check if you’re in the correct Band.

How often you pay can also have an effect on how much road tax you have to pay every year. If you can afford it, you should make a single lump sum as there is a 5% surcharge for paying every month whilst twice-yearly payments work out as £10 more expensive.

The biggest savings in road tax can  be made by choosing the right car

However, the biggest savings can be made by choosing the right car. Whether you’re purchasing a new car or buying second-hand, you should think about how the type of car and its CO2 emissions can affect the price you pay for road tax. The other advantage of buying a vehicle from a low-Tax Band is that it holds its value much better than other higher-taxed cars and it’ll be much easier for you to sell.

Questions:

Which alternative fuels receive a discount on road tax?

Under the new rules, alternative fuel vehicles like hybrids, bioethanol and liquid petroleum gas receive a discount of £10 and only electric cars are now tax-exempt.

Is it worth converting a car to liquid petroleum gas?

Some motorists have converted their vehicle to LPG since they save on road tax, fuel bills and get more miles to the gallon. However, you must also factor in the £1,200 on average which is needed to convert the system/engine plus the cost for the annual check-up.

Electric vehicles, which are exempt from paying road tax, are charging by the side of the street

How many cars use alternative fuels in the UK?

DVLA figures for 2012 show that 1.4% of newly-registered vehicles used alternative fuels.

How many cars are there in the UK?

Of the 34.5 million vehicles registered with the DVLA, 28.7 million are cars.

The future of road tax revenue

Changes in taxation are often used by governments to change the public’s behaviour. This can be clearly illustrated in successive governments’ commitment to cut CO2 emissions. However, the rise in ‘green vehicles’ has meant a corresponding loss in revenue from motorists – by 2029, the Office of Budget Responsibility has predicted the increasing efficiency and growth of plug-in electric vehicles could end up costing £13 billion in lost VED. Increasing taxes on alternative energy would go against all recent policies while increasing duty on petrol would be widely unpopular.



So where can this revenue be found? Recent tax increases on newly-registered cars are a way to start while other solutions have been suggested. In a 2012 IFS study (funded by the RAC Foundation), it was recommended that there should be a nationwide system of road pricing to charge drivers by each mile driven, with the highest rates for congested areas at peak times. This would mean that rural drivers would pay the least and present motoring taxes could be reduced. However, it isn’t sure how popular a system of tolls would be in the UK where everyone is used to using the road network freely. Would any government risk suggesting it?


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About the author

Thomas Henderson

Thomas worked as a consultant in personal finance in the UK for 18 years. He has found a passion in sharing his experience on familymoney.co.uk

Thomas also takes pleasure in woodworking, reading and observing stock market trends.

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About The Author

Thomas Henderson

Thomas worked as a consultant in personal finance in the UK for 18 years. He has found a passion in sharing his experience on familymoney.co.uk

Thomas also takes pleasure in woodworking, reading and observing stock market trends.

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