Everything you need to know about the new VED rates

HMRC / Tax 

If you're currently wondering which car to choose for your next lease we have a little bit of advice. What we'd like you to do is go to a cash machine, draw out £500, and throw it away. That's right, just chuck it in the nearest bin and walk away. That's effectively what you could be doing if you haven't got your head around the new VED rates that will come into force on the 1st of April before you make your decision.

Thanks to a few well publicised emissions scandals - and government's usual inability to properly organise the proverbial social gathering in a brewery - new car tax rates have been dropped on us and they could make a big difference to the cost of your new car. The reason for the changes is the switch from the old NEDC (New European Driving Cycle) method of calculating emissions to the new WLTP (Worldwide Harmonised Light Vehicles Test Procedure) system. In theory the WLTP method of calculating emissions is much better because it gives a more accurate indication of the CO2 levels under every day driving conditions rather than under test conditions. In practice the actual amount of CO2 a car emits is no different regardless of which system you use to measure it; the only change is in the way the figures are being presented to us. Essentially a car's CO2 emissions will remain exactly the same but the method of measurement is now more accurate.

The downside to this is that pretty much every car on the market will suddenly produce more CO2 than it did under the old NEDC testing system. It doesn't, not a single thing has changed under the bonnet, but as far as the Inland Revenue is concerned the numbers say otherwise and you'll be taxed accordingly.

The new VED bands will apply to any car registered after the 1st of April 2020 but it will affect every car differently.

The first thing to know is that your car tax will be split into two parts. There is one rate for a new car's first year on the road, and this varies depending on the vehicle's CO2 emissions. Once the car has been on the road for 12 months it then reverts to the second part of the tax, and that is affected by the list price of the vehicle when new. To further complicate the issue both tax rates are affected by what powers the car; electricity, petrol/diesel, or a hybrid system.

First-year road tax rate

The tax band for the first-year of registration is entirely based on the CO2 emissions. The rate ranges from £0 for zero-emission cars and AFVs (Alternatively Fuelled Vehicles) that emit 50g/km or less, rising to £2,135 for models that emit 255g/km or more.

It's also worth noting that a diesel vehicle can sit in the same CO2 band as a petrol model but because the Government decided to penalise diesel drivers you'll still pay more tax. The excuse for this is that diesel cars don't comply with the new RDE2 standards, an excuse that would be far more credible if it weren't for the fact those new regulations don't legally come into effect until 2021, and some manufacturers are already happy to declare their vehicles fully compliant even though the regulation they're complying with won't actually exist until next year. Not that the taxman is concerned with such contradictions.

The result of this little tweak to the tax rates is that a petrol car that emits 100g/km of CO2 will cost £130 for the first year while the equivalent diesel will cost £150. In reality this won't make a huge difference as paying an extra £20 or £30 for one year isn't going to break the bank, especially when it's rolled into the OTR cost, but for those drivers who need the range and economy of a diesel it's a bit of a low blow.

What everyone will need to be aware of under the new VED rates is that the specification of your new lease car could also end up costing you more in tax. Under the old NEDC system each “family” of car shared a tax bracket whereas the WLTP system gives every individual car its own CO2 rating. Basically that means if you'd previously opted for something like a 1.0-litre Fiesta you'd pay the same road tax as every other driver of a 1.0-litre Fiesta. Under the new system you could find two virtually identical cars paying two different tax rates just because one has air conditioning for example, and the other one doesn't. Anything that affects the emissions can affect the tax band your new car falls into so you really need to pay careful attention to specification options or you could find yourself paying more in VED.

Annual road tax rate

So once you've paid the car tax on your first year's motoring you then move onto the flat rate of road tax. This has been raised to £145 (up from £140) with a £10 annual discount for hybrids, mild hybrids and plug-in hybrids dropping their tax rate to £135 a year. This is the annual tax rate that will apply for the life of the vehicle and should only increase with inflation. Except there's also a catch here too. If you are fortunate enough to be leasing something nice that happens to carry a list price in excess of £40k you'll get clobbered with a separate payment on top of the annual rate.

Cars with a list price of £40,000 or more are subject to a further £320 annual supplement that runs for five years. This only starts after the first-year CO2-based charge so the supplement will apply from year two to year six of the car's life. This means if your new car breaks the £40k barrier you could be paying up to £465 per year in road tax. After the six years the annual tax then reverts to the standard rate regardless of the car's list price.

And before you all run off and try haggling the price of your dream car down below the magic £40,000, it won't make any difference. It doesn't matter how great a deal you manage to strike, the tax is based on the list price and includes trim levels and the cost of any options so there's no escaping the extra tax. Even if you choose a zero emission, fully electric car that is exempt from both the first-year tax and annual road tax, if it breaks the price barrier you'll still be liable for the £320 per year for five years.

In fact if you really want to avoid the potential increases in VED brought on by the new testing system there really is only one way to do it: you need to sort out your new lease and make sure your new car is registered before the end of March. That way you'll still fall under the existing VED brackets and you could be paying less in road tax for the exact same car.

Time is running out so you will have to move fast and keep your fingers crossed. Although at least now if you don't manage to sneak in before the changes take effect you'll have a much better idea of how the new VED rates will affect you and you can make an informed decision.

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