New VED system takes effect from next April

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New Vehicle Excise Duty System

Large rises for new cars in first year of registration

A new system of Vehicle Excise Duty (VED) comes into force from next April, with large increases in tax in the first year of registration for all new cars followed by a flat rate for all subsequent years, which creates winners and losers.

The new system was first announced in July last year when then-Chancellor George Osborne delivered the first Conservative Budget in 18 years.

VED currently raises around £6bn for the Exchequer, but Mr Osborne said the new system would be used to fund a long-term solution “to fix Britain’s poor roads”.

As car buyers opt for the latest technologies that deliver increasingly lower carbon emissions, by 2017 three-quarters of new cars won’t pay VED under the existing system, said the former Chancellor.

What replaces the existing system?

As a result, from April 2017, a new VED system will be introduced and will be used to create a roads fund by the end of the decade.

While there will be no change to VED for existing cars, for all new cars the duty in the first year will be set according to emissions, like today. Thereafter, in subsequent years, there will be three duty bands – zero emission, standard and premium.

For standard cars – which covers 95% of all cars sold in the UK – the charge from 2017 will be a flat rate £140 a year. This is less than the average £166 a year that motorists pay today, but the new system is expected to only raise the same amount of revenue as today.

The former Chancellor also promised:

“From the end of this decade, every single penny raised in VED in England will go into that fund to pay for the sustained investment our roads so badly need.”

It remains to be seen, of course, whether the new regime honours that pledge.

What do the new rates look like?

VED bands and rates for cars first registered before the April 1 2017 deadline and after.

Emissions CO2 g/kmFirst year rate pre April 17 (£)First year rate post April 17 (£)Total  increase in first year (£)Pre April 17 annual rate (£)Post April 17 annual rate (£)Total increase/ decrease from second year (£)
Over 2551,1202,000880515140-375


Cars with a list price of above £40,000 will attract £310 per year for the first five years in which the standard rate is paid.

ULEVs penalised

As with the introduction of many new schemes, there are winners and losers with the new system. Many commentators have queried why ultra low emission vehicles (ULEVs) are now being subject to VED, rather than being incentivised with a zero rate as before.

For example, ULEVs emitting less than 50g/km of CO2 will from April pay £10 in the first year of registration and £140 per year thereafter. Currently they pay no VED at all.

The same applies to those emitting 51-75g/km. Currently paying no VED, from April they will be liable for £25 in the first year and £140 thereafter, while cars emitting 76-90g/km will face a charge of £100 in the first year and £140 thereafter.

Meanwhile, cars emitting 91-100g/km, also currently zero rate, will be charged  at £120 in the first year, and £140 thereafter, an increase of £400 over the first three years of the vehicle’s operation.

Mid and top-range hardest hit

The cars that are hit hardest in the first year of registration are those currently emitting in the mid-range of CO2 emissions and those classed as ‘gas guzzlers’ at the top end of the VED spectrum.

For example, a car with emissions of 151-165g/km and currently taxed at £185 in the first year, will see an increase from next April of £315 to £500 in the first year of registration.

This emissions band includes many mainstream company cars such as the Audi A4, Ford Mondeo, Toyota Avensis, Vauxhall Astra, Mokka and Insignia, BMW 1 and 3 Series – and many more.

Not surprisingly perhaps, the largest increases in the first year are at the top of the VED bandings.

Cars that emit 226-255g/km of CO2 face an increase of £815 in the first year of registration from £885 to £1,700, while those over 255g/km face an £880 increase from £1,120 currently to £2,000 post April 2017.

Winners in subsequent years

However, conversely, the largest winners in subsequent years of registration are also at the mid-to-top end of the VED range.

Because of the introduction of the flat rate of £140 per year for any model following the first year of registration, all cars emitting more than151g/km of CO2 will see some form of reduction in the second year and all subsequent years thereafter.

So, for cars emitting 151-165 g/km of CO2, there will be an annual saving of £45; cars emitting 166-170g/km will see a saving of £70 per annum;  and for cars emitting 186-200g/km of CO2 there will be an annual saving of £130.

At the top end of the scale, cars that emit 226-255g/km of CO2 will see a reduction of £360 per annum in their charge for VED, while those over 255g/km will have a reduction of a £375 a year – see chart.

Choose low emitting cars

As all forms of motoring taxation, including Benefit-in-Kind (BIK) tax and VED, are linked to the vehicle’s carbon emissions, there are savings to be made from selecting cars with emissions as low as possible within any fleet policy.

However, there is a huge range of models to choose from and any vehicle choice should always be balanced against company objectives.

For example, does the nature of the business mean there are large numbers of vehicle travelling long distances around the country, or is there a preponderance of urban driving with short distances travelled in congested environments.

Such factors need to be taken into account when selecting the most suitable vehicles for the fleet, and gaining the early buy-in of drivers to a new fleet policy will make the objectives easier to achieve.

Drivers should be made aware of any financial savings available to them, especially from a tax point of view as low-CO2 emitting cars will not only reduce BIK  and VED tax bills  but will cut both corporate and private fuel costs, too.

Your fleet management advisor should be able to help you with these decisions. If you would like to discuss how to put together the ideal policy for your fleet, please get in touch.

November 7th, 2016|Categories: Fleet, Vehicles|

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