Vehicle Excise Duty costs will rise for most drivers this month – but especially so for those in the market for a new car.
The Chancellor confirmed in his latest Budget document that VED, as car tax is officially known, will rise in line with the Retail Price Index – with annual increases for drivers of between £5 and £70.
There are three significant changes to car tax from this month, including the RPI hike, additional costs for buyers of expensive models and increases to Benefit in Kind company car tax…
How will car tax hikes impact you in 2021? Find out how much extra – if any – in Vehicle Excise Duty or Benefit in Kind tax you’ll be paying on your motor from the beginning of this month
Blow number 1: VED bands increased in line with RPI
Chancellor Rishi Sunak confirmed in last month’s Budget document that VED rates will continue to rise from April in line with the RPI inflation index.
Here’s how it impacts you depending on when your car was first registered:
Buyers of brand new cars registered from 1 April 2021
The impact of the RPI hike increases some VED band, ranging from £5 to £70 for all models producing more than 76g/km CO2 – and for diesels there is a hike for any model emitting over 51g/km CO2 (see increases in table below).
The biggest increases come at the higher end of the emissions table, with the Government’s adjustment for inflation pushing first-year tax costs £40, £60 and £70 higher than if a motorists had their car registered by 31 March 2021.
It means the most-polluting new petrol and diesel cars a massive £2,245 to tax in the first 12 months.
|Emissions (g/km) CO2||First year rate PETROL and RDE2 DIESEL cars 2020-2021||First year rate PETROL and RDE2 DIESEL cars 2021-2022||Increase||First Year rate for non-RDE2 DIESEL cars 2020-2021||First Year rate for non-RDE2 DIESEL cars 2021-2022||Increase||ALTERNATIVE FUEL cars 2020-2021||ALTERNATIVE FUEL cars 2021-2022||Increase|
Owners of cars registered between 1 April 2017 to 31 March 2021
For owners of cars from 1 April 2017 to 31 March 2021, the RPI hike will also result in an increase in the standard-rate car tax, which is paid from the car’s second year onwards.
This has been upped by £5, rising from £150 to £155 for petrol and diesel models and increasing from £140 to £145 for ‘alternative fuel vehicles’, including hybrids and plug-in hybrids.
The standard rate for VED for zero-emission electric and hydrogen cars bought during this period is wavered.
|Fuel type||Standard rate 2020-2021||Standard rate 2021-2022||Increase|
|Petrol or diesel||£150*||£155||£5|
|Alternative fuel (hybrid)||£140*||£145||£5|
|*models with a ‘list price’ (the published price before any discounts) of more than £40,000 to pay an additional premium tax of £335 for the first 5 years of the standard rate|
Owners of cars registered between 1 March 2001 and 31 March 2017
For older petrol and diesel cars registered between March 2001 and March 2017, the impact of the RPI hits cars with CO2 emissions in excess of 121g/km CO2.
Annual VED costs will rise between £5 to up to £20 for the most polluting models with CO2 emissions of 226g/km or more.
Oddly, alternative fuel vehicle – hybrids and plug-in hybrids – have been stung with steeper increases than conventional petrol and diesel cars.
Hikes range from £5 up to a more substantial £30 for the handful of models that emit more than 226g/km of CO2.
|VED Band||CO2 emissions (g/km)||2020-2021 Standard rate* for PETROL AND DIESEL cars||2021-2022 Standard rate* for PETROL AND DIESEL cars||Increase||2012-2021 Standard rate* for ALTERNATIVE FUEL VEHICLES||2021-2022 Standard rate* for ALTERNATIVE FUEL||Increase|
|A||Up to 100||£0||£0||£0||£0||£0||£0|
|**Includes cars emitting over 225 g/km registered before March 23, 2006|
Owners of cars registered before 1 March 2001
For the oldest vehicles registered before 1 March 2001, VED is split into just two bands based on engine size – up to 1.55 litres and over 1.55 litres.
For those in the lower group, the rise is £5 a year, up from £165 to £170. For the larger engine capacities, minister have hit them with a £10 increase, rising from £270 to £280 from 1 April 2021.
Classic models over 40 years are exempt from VED on a rolling basis, meaning all models registered before April 1981.
|Engine size||2020-2021 Standard rate* for PETROL AND DIESEL cars||2021-2022 Standard rate* for PETROL AND DIESEL cars||Increase|
|Up to 1549cc||£165||£170||£5|
Blow number 2: ‘Expensive car’ tax for models over £40k hiked by £10
As well as increasing the standard rate for all vehicles with a combustion engine, there has also been a hike to an additional premium rate tax for models purchased after 1 April 2017 that cost more than £40,000 when new.
Motorists who spend over £40,000 on a new car are being stung with an additional tax that impacts them from the second year of ownership and for the subsequent four years
This premium rate is paid on top of the standard rate from year two for five years.
It was introduced in 2017 and has proven to be an unwelcome hit to the pockets of motorists purchasing premium and sportier models.
For those drivers who bought a £40,000-plus car new after April 2017, they will be paying the premium rate on top of the standard rate from April 2018 to April 2022.
The cost of this ‘expensive car’ tax has risen from £325 last year to £335 from 1 April 2021.
That means if you drive a post April 2017 petrol or diesel car with a ‘list price’ (the published price before any discounts) of more than £40,000, you’ll be forking out a whopping £490 (£480 for alternative fuel vehicles) in standard rate tax this year, irrelevant of if it produces low CO2 or extremely high levels of carbon dioxide.
As part of efforts to reward electric car buyers for choosing a green model, this expensive car taxation is not required for zero-emission models bought during this period.
This saves early adopters switching to new EVs before the ban on new petrol and diesel car sales in 2030 up to £1,675 – if they keep their battery-powered vehicle for six years.
Blow number 3: Benefit in Kind tax rates upped by 1% across the board
While VED rates for privately owned vehicles increased from 1 April, any changes to Benefit in Kind (BiK) rates for company car drivers doesn’t hit until 6 April. And these motorists aren’t being spared from hikes in 2021.
BiK rates have been increased by one per cent across the board.
It follows the landmark decision last year to scrap 16 per cent BiK rates for electric cars as part of the Government’s wider effort to increase battery-powered fleets and encourage business drivers to switch to greener motors.
From 6 April 2021 to 5 April 2022, BiK for electric vehicles is up from zero to 1 per cent. It will rise to 2 per cent over the next three years.
The move means company car drivers with battery-powered vehicles could see their annual tax costs increase by more than £100, given the high retail price of EVs.
For instance, drivers of a £30,000 Nissan Leaf paying 20 per cent income tax will be paying around £60 a year for BiK, while higher earners subject to 40 per cent income tax will be paying approximately £135.
Benefit in Kind tax on electric vehicles was scrapped last year in a bid to encourage company car drivers and businesses to switch to zero-emission models. From 6 April 2021, all BiK rates have been upped by 1% – though it impacts drivers of petrol and diesel motors far more than those using EVs
In preparation for the 1 per cent BiK charge for EVs from 6 April 2021, Octopus Electric Vehicles launched a new 100 per cent electric car leasing service for businesses looking to become more environmentally friendly.
The scheme, called Electric Dreams, is a salary sacrifice incentive, which allows staff to pay for a new electric vehicle out of their gross salary.
This could potentially save customers thousands of pounds on national insurance and income tax.
The firm said it is introducing the programme in response to a surge in interest in electric vehicles from businesses with Huel and Purplebricks among the large firms who have already signed-up. Find out more about the scheme in our full report.
By comparison, drivers of petrol and diesel cars are paying far more in taxation for the company vehicles.
For instance, motorists at the wheel of motors emitting between 165 and 169g/km CO2 will, from 6 April 2021, pay 37 per cent BiK tax instead of 36 per cent last year.
Those with motors emitting between 155 and 159g/km C02 will now pay 35 per cent BiK while those producing 130 to 134g/km CO2 are subject to 30 per cent BiK, up from 29 per cent.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.