The UK Government has announced significant changes to Vehicle Excise Duty (VED) rates, effective 1 April 2025, impacting both new and existing vehicle owners. These adjustments aim to align VED rates with inflation and incorporate zero-emission vehicles into the tax framework.

Adjustments to VED rates

From April 2025, VED rates for cars, vans, and motorcycles will increase in line with the Retail Price Index (RPI). This standard uprating ensures that VED receipts are maintained in real terms.

A notable change, however, is the inclusion of zero-emission vehicles in the VED system. Currently exempt, these vehicles will be subject to VED from 1 April 2025. Zero-emission cars registered on or after this date will pay the lowest first-year rate, equivalent to vehicles emitting 1-50 g/km of CO₂. In subsequent years, they will transition to the standard annual rate.

Impact on electric vehicles (EVs)

Extending the “expensive car supplement” to electric vehicles will significantly impact demand. From April 2025, EVs with a list price above £40,000 will incur an additional VED of £425 annually for five years, starting from the second year of ownership. This is in addition to the standard VED rates. Industry experts argue that the £40,000 threshold does not reflect luxury for EVs due to their generally higher costs than petrol or diesel cars.

Changes for older vehicles

Owners of older vehicles will also face significant changes under the updated VED system. For cars registered between 1 March 2001 and 31 March 2017, VED rates have historically been calculated based on the vehicle’s CO₂ emissions. However, from April 2025, a key shift will occur for vehicles currently classified in Band A, which emit up to 100 g/km of CO₂. Previously exempt from VED, these vehicles will be reclassified into Band B, resulting in a mandatory annual charge.

This adjustment marks the end of long-standing tax breaks for many low-emission vehicles that were once considered environmentally friendly. As a result, owners of these cars will need to account for an added expense in their annual vehicle costs. While the specific rate for Band B is yet to be finalised, the change highlights the Government’s broader strategy to ensure that all vehicles contribute to VED revenues, regardless of their emission levels.

First-year rates for new cars

Under the updated rules, first-year VED rates for new cars will significantly increase, with higher-emission vehicles bearing the brunt of the changes. These rates are intended to reflect the environmental impact of a car’s emissions during its first year on the road. For example, cars emitting 76-90 g/km of CO₂, which previously fell into a more modest rate band, will see their first-year tax charges double compared to the rates applicable in 2024/2025. 

Similarly, vehicles emitting over 151 g/km of CO₂ will experience even steeper increases, reinforcing the Government’s intent to disincentivise the purchase of higher-emission vehicles. These adjustments aim to differentiate the costs of running high-emission cars from low- or zero-emission alternatives, promoting a shift toward greener vehicle choices.

For prospective buyers, these changes mean factoring in the higher upfront tax cost when budgeting for a new car, especially if it falls into a higher emissions category. These first-year VED charges, often referred to as the ‘showroom tax’, are payable at the point of vehicle registration, making them an immediate financial consideration for new car purchasers.

Implications for vehicle owners

These changes are designed to encourage the adoption of zero-emission vehicles by widening the tax differentials between zero-emission, hybrid, and internal combustion engine cars. However, they also mean that many vehicle owners will face higher VED costs. Vehicle owners should review their current vehicles’ VED bands and consider the financial implications of these upcoming changes.

Industry experts have expressed concerns about the impact of these changes on the adoption of electric vehicles. The Society of Motor Manufacturers and Traders (SMMT) indicates that 70% of new EVs will be subject to the luxury tax, potentially discouraging families and businesses from transitioning to electric cars. Critics urge the Government to rethink the policy to support the shift to green vehicles better.

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