What you need to know about Vehicle Excise Duty

Whether you call it car tax, road tax, or vehicle excise duty, paying tax on your car is a legal requirement, if you want to drive in the UK.

Felicity Hannah Published on 30 June 2021. Last updated on 01 July 2021.
What you need to know about Vehicle Excise Duty

To make sure you don’t accidentally flout the law, here’s what you need to know about car tax or Vehicle Excise Duty (VED).

How does car tax or VED work?

You need to pay car tax whenever you buy a new car and then every year after that, unless you are exempt.

It’s a good idea to update yourself on the rules as there have been a few changes in the last few years. Now, owners of new cars must pay a first-year rate, which is worked out according to their CO2 emissions, and after that their owners must pay the standard rate.

That first year rate ranges from £0 right up to £2,245 for the most polluting vehicles. So if you’re planning to buy a car with quite high emissions then it is important to factor that into the cost.

After that first year, there will be an annual amount that has to be paid as long as the car is in use and unless it becomes exempt. Cars that cost more than £40,000 new will have to pay a further £335 a year for five years, unless it has zero emissions.

If you can afford it, it's best to pay your car tax in one annual payment. You can pay monthly or every six months but there is a 5% surcharge for spreading the cost.

Even if your car is zero-rated because it’s a low-emission vehicle, you will still need to go through the same process as someone who is taxing it each year, although there will be nothing to pay. Driving without tax is a serious matter and you could face a fine for doing so.

In some cases, cars have been clamped, seized or even crushed, so add a note to your calendar and act fast when the Driver and Vehicle Licensing Agency (DVLA) posts you a reminder.

How much is Vehicle Excise Duty?

After the first year, owners of cars that are not zero-emission will pay up to £155 in VED. It will rise to £162.75 over the year if you choose to pay the tax monthly.

If you have a hybrid car, one that uses both traditional fuel and an electric motor, then it may be a zero-emission car, which will mean it is exempt from paying road tax. But if it isn’t, you can still get an annual discount of £10.

However, if your car cost more than £40,000 when it was new, there will also be an extra £335 charge a year for the first five years. From year six it will be back to the standard yearly amount.

If the car is zero-emission but has a list price over £40,000 you will be exempt from this charge.

» MORE: The costs of the UK's most popular cars vs leading electric vehicles

How do I pay my VED?

When you are taxing a car for the first time, you will need the green ‘new keeper’ slip from a log book to do so. If you have a debit or credit card then you can pay online or set up a direct debit.

For cars you already own, the DVLA should send you a reminder letter each year a few weeks before it’s due. That letter makes everything really simple as you can then pay online, over the phone or at the Post Office.

If you don’t have that letter for any reason then you can get the information you need from the car’s logbook.

How soon do I need to pay car tax?

There is no ‘grace’ period when it comes to car tax. You need to have it in place before you drive a vehicle away – and this is something that your car dealer should be able to help you arrange.

Car tax exemptions

If you are not using your car then you don’t have to pay car tax – as long as you have informed the DVLA that it is out of use. You do this by registering a SORN, which is slightly catchier than what it stands for - a ‘Statutory Off Road Notification’.

When you register a SORN, you can also get a refund for any remaining months of tax you have already paid for. However, you absolutely cannot use the car until it is taxed again.

There are other groups who don’t have to pay VED. You may be exempt if you have certain mobility disabilities. And so-called ‘historic vehicles’ that are 40 years or older don’t have to pay road tax either. Good news for classic car drivers!

And some cars don’t have to pay VED because their emissions are so low.

However, even if you are exempt from paying car tax, you do still need to update it every year. You just won’t need to make a payment. Don’t forget to do so just because there’s no actual bill as your car would then count as untaxed.

Can I check if a vehicle is taxed?

Yes and the good news is that doing so is very easy. Visit this government page and enter the car’s number plate – it will tell you whether the tax is up to date.

If you have your vehicle log book handy (the V5C paperwork) then you can also check the tax rates for that specific car.

What happens when a vehicle is sold?

Vehicle tax is no longer transferred on with the car when it’s sold. So if you buy a car that has just been taxed then you still have to tax it before you can drive it.

However, when you sell a car and transfer its ownership, you should be refunded for any tax that you haven’t used. That should automatically be processed by the DVLA.

Choosing a car that’s cheaper to tax isn’t just good for keeping the running cost of your car down. It can also make your vehicle more attractive to buyers if you do come to sell it.

What does VED pay for?

A long time ago the VED that was paid by drivers would go into a dedicated pot of money to spend on roads but that’s no longer the case.

Now the tax goes into the Treasury’s coffers and is used as part of the general pool of money spent by the government. That means, it’s spent on the NHS, on schools, on other costs as well as on roads and road infrastructure.

Do motorcycles and mopeds pay vehicle tax?

You do need to pay Vehicle Excise Duty if you’re driving a motorbike or a moped but because the emissions are usually lower with those vehicles, the tax will be lower too.

For example, a motorcycle up to 150cc will cost £21 a year to tax, while a bike over 600cc will be £96 a year.

What other tolls and taxes do I have to pay to drive?

In the UK we have a motorway and also some bridges and roads that charge a fee if you want to drive on them. They’re known as toll roads and are usually privately owned.

The fees paid for using these stretches of road or bridge go towards the cost of building and maintenance and usually a profit for the owner if there is one. You can usually avoid taking a toll road and paying the fee, although it might mean travelling a longer distance or through a more congested route.

Drivers also pay tax on the fuel they use, known as fuel duty. For petrol and diesel this is currently 57.95 pence per litre (correct in January 2021), although it can be changed by the chancellor. You will also pay VAT on fuel.

What might change?

So now you know how road tax or car tax or VED is worked out and paid – but what might change in the future?

At the moment electric vehicles and other zero-emission vehicles are exempt from paying it, but as more of these efficient cars come on our roads it seems likely this rule will change.

The plan is for new petrol and diesel cars to be banned by 2030, which will risk leaving a big hole in the nation’s finances if the rules aren’t changed. Perhaps that will mean more toll roads, or perhaps it will mean drivers have to pay Vehicle Excise Duty on electric and zero-emission cars.

Whatever happens, it seems likely that the most polluting vehicles will continue to be the most expensive to run.

» MORE: Is switching to an electric car financially beneficial?

Source: Getty Images

About the author:

Felicity is a personal finance journalist. She regularly writes for The Times, The Mirror and The Independent. She has won five awards for her work, including Household Money Journalist of the year. Read more

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