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New road tax being introduced from 1 April 2017

From 1 April 2017 a new regime of road tax is due to be introduced. The cost implications for individuals and businesses may be notable and current plans for vehicle replacement may need to be reviewed.

The government has retained CO2 as its measure of environmental harm and for cars first registered from 1 April 2017 onwards, first year road tax will still vary according to CO2 emissions to encourage take-up of the cleanest cars. As examples, first year road tax will be £500 where CO2 emissions are from 151 to 170 g/km, and a whopping £2,000 where they exceed 255 g/km. Zero-emission cars such as those that run purely on electricity or hydrogen, will enjoy the zero rate of VED in the first year.

Surprisingly, road tax for subsequent years will be at a standard rate of £140, with two significant exceptions. Firstly, cars with a list price above £40,000 will attract a supplement of £310 on their standard rate for the first five years, even if their emission levels are very low. Secondly, no road tax will be payable on zero-emission cars.

Despite environmental concerns about pollution, the government has come to the view that the current road tax system is unfair because owners of newer cars pay little or no road tax, while owners of older cars generally pay much more.

The current mechanism for calculating road tax was introduced in 2001 and is based on official assessments of a vehicle’s CO2 emission levels. At that time the average UK new car CO2 emissions were 178 grams per kilometre (g/km).

By 2003, when average new car emissions had reduced to 173 g/km, the government introduced the ‘Band A’ threshold of 100 g/km, below which cars paid no road tax at all.

Road tax incentives, together with EU emission targets, have continued to positively impact purchasing trends and now, in 2016, the average new car CO2 emissions have fallen to 125 g/km.

As a consequence, an increasingly high proportion of ordinary cars now fall within the zero or lower-rated bands and therefore the revenue generated by road tax is diminished. Indeed, at present 70% of all new car buyers - some 1.7million a year in the UK - pay no road tax because their vehicle emissions are so low.

It is noteworthy that all cars first registered before 1 April 2017 will remain on the current road tax system.

Whether the new rules are an indication that government is content to defer to EU emission targets (95 g/km by 2020) to achieve pollution control is yet to be seen.  Given the likelihood that engineering advances in pollution control will continue, would a road tax structure that encourages the replacement of older, higher-polluting cars have been more sensible?