Plain English guide to UK road tax

When shopping for a new car it’s easy to overlook some of the extra costs you’ll face during your time with the shiny four-wheeled thing on your driveway.

One of the biggest annual costs, along with insurance, is the cost of the road fund licence (also known as road tax and Vehicle Excise Duty). Finding the right car could save you money in the long run, but which is the right one for you? There is a confusing array of abbreviations, tax bands and figures that determine the rate you pay, so we’ve explained the UK road tax system in as simple terms as possible.

How much will my car cost to tax?

For cars registered before 1st March 2001 – when the issue of pollution wasn’t taken quite as seriously as it is now – Vehicle Excise Duty (VED) is calculated based on the size of a car’s engine. If a pre-2001 vehicle’s engine is larger than 1549cc, it costs a flat rate of £230 per year to tax, with anything smaller costing £145. This means you could pay the same rate of tax whether you drive a 1980s Lamborghini Countach (below) or a 1999 Ford Focus 1.6 – so why not spoil yourself?

For post-2001 cars, a more thorough taxing structure based on carbon dioxide (CO2) emissions is employed. The fewer grams per kilometre (g/km) a car pumps out of its exhaust, the less it will cost to tax. There are thirteen different bands, which are assigned the letters A to M. If a car falls into Band A, it emits less than 100g/km of CO2, and is therefore free to tax. From there, the rate of tax increases in increments up to band M, where users will have to pay an annual fee of £500 for a car which emits over 255g/km.

In the first year, however, the costs are slightly different. A greater incentive is placed on buying a “cleaner” car, and a larger penalty for one which pollutes more. Anything rated from band A to D is free for the first twelve months, while a band M car costs a shade under £1,100.

For cars registered after 1st March 2001 but before 23rd March 2006, the maximum band that can be applied is K (£285 per year). This is to help owners of older, more-polluting cars avoid ending up with expensive bills when they come to renew their tax.

But I’ll be getting a company car soon…

In the case of company cars, the costs are completely different. Given the perks of company car use generally include insurance and maintenance costs, Her Majesty’s Revenue and Customs (HMRC) tend to charge a much higher rate of tax for the privilege.

As with VED, the company car tax system is focused on CO2 emissions, however, the rates are based on a percentage value of the P11D price of the car rather than a simple flat rate. The P11D value is effectively the car’s list price as determined by the government.

As it stands in 2014/2015, a car emitting between 76-94g/km of CO2 will be charged a rate of 11 per cent of the list price of the car, while a car emitting over 210g/km will be charged 35 per cent. Diesel cars will be charged 3 per cent more than an equivalent petrol, with the same maximum rate of 35 per cent.

Still with us? Good, because it doesn’t end there. Once this figure – known as Benefit In Kind (BIK) – is established, only a portion of this figure will be charged according to how much you earn. Wages less than £31,865 a year pay 20 per cent of that rate while, above that, there is a 40 per cent tariff. Anyone earning over £150,000 should expect to be charged at a rate of 45 per cent.

Take a £20,000 car as an example, which emits 136g/km of CO2. This figure would place the vehicle in the 20 percent BIK bracket, meaning that the BIK rate would be £4,000. If you earned £30,000 per year, you would pay 20 percent of that £4,000, so the final fee due to the government would total £800, or £66 per month out of your salary.

How do I tax my car?

As of the 1 October 2014, and after 94 years of operation, it is no longer necessary to display a tax disc. Instead, all the information is stored on the DVLA’s vehicle register, which is used by the police, and is also accessible to the public, meaning that drivers can check when their own tax expires. Everybody will still be sent a reminder in the post, too, so it should be just as easy to keep everything up to date.

Things also changed in terms of selling your car. It’s no longer possible for the vehicle tax to carry over to a new owner. At the point of selling the car, (or trading it in at a dealer) drivers need to inform the DVLA of the change, and they will refund any full months remaining.

This also means that any used car now needs to be taxed immediately upon purchase, which might make things a little more of a faff to sort out if you buy used. If you’re buying new, the dealer will have everything sorted for you when you pick the car up.

Also new for 2014, the DVLA has allowed buyers to pay their tax as a monthly cost, spreading the cost more evenly into monthly chunks as opposed to a lump sum.

What next?

So now you know how vehicle tax works, head over to our homepage and pick a new car to configure and see how much money you could save. If you’d like to know how much it costs to fuel your car take a look at our investigation into fuel prices – you might just be  surprised!

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