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What is Vehicle Excise Duty?

Vehicle Excise Duty (VED) is an annual tax paid by owners of vehicles driven or kept on public roads. The tax applies to vehicles in the whole of the UK.

How much a vehicle owner pays in VED depends on a number of factors, including the type of vehicle owned, when it was first registered, or its environmental performance.

Certain vehicles are exempt from paying VED. For instance, vehicles used by someone receiving the enhanced mobility element of Personal Independence Payment (PIP). Currently, fully electric vehicles are exempt.

A duty on motor vehicles has existed in the UK since the early 20th century. The primary legislation for VED is consolidated in the Vehicle Excise and Registration (VERA) Act 1994. VED rates are usually changed via the annual Finance Bill.

VED raised £7.4 billion in 2022/23. The Office for Budget Responsibility estimates that this figure will increase to £9.4 billion by 2027/28.

The following table shows an overview of the VED rules according to different types of vehicles.

Current VED rules on different types of vehicles

Cars

·         Cars first registered on or after 1 April 2017 pay a 1st year rate that is graduated according to CO2 emissions

·         All cars pay the same flat rate from 2nd year onwards. Cars with a list price over £40,000 pay an ‘expensive car supplement’ from the 2nd to 6th year of registration

·         VED rates for cars registered between 1 March 2001 and 31 March 2017 are always graduated according to CO2 emissions

Light Goods Vehicles (LGVs)

·         LGVs are charged a flat VED rate regardless of their environmental performance (except electric vans)

·         Certain LGVs that are Euro 4 or Euro 5 compliant face a lower VED rate, depending on the year of registration

Heavy Goods Vehicles (HGVs)

·         HGVs are placed in one of 87 different rates, ranging from £80 to £1,505 per year, depending on their structure, their weight, the number of axles, and the weight of the trailer

·         HGVs may also be liable for an additional HGV road user levy. Broadly, qualifying HGVs  are placed in one of six bands according to their weight and their Euro emissions class. UK-based HGVs pay the levy at the same time as VED

·         Foreign HGVs are also liable to pay an HGV levy (as they are not liable to pay VED) when they use UK A-roads or motorways. They have to pay the levy before entering the UK

Motorcycles

·         Motorcycles pay four different VED rates depending on their engine size (cc)

·         Rates do not differ it the motorcycle has a sidecar attached to it

Source: DVLA, Vehicle tax rates (V149 and V149/1), GOV.UK, updated 2 August 2023

VED policy debate

The original tax that became VED (introduced in 1921) was created to provide funding for road construction and maintenance. This is no longer the case, and VED revenue is not hypothecated for road maintenance. More recently, VED became more closely linked to vehicles’ environmental performance (to reflect wider negative externalities of car usage).

VED has been criticised for not effectively targeting the external costs of motoring (for instance, road damage and pollution), since it is paid at the same rate regardless of how much the vehicle is getting used. Organisations such as the Institute for Fiscal Studies (IFS) have suggested that VED should be abolished (PDF), and for the revenue lost to be recouped through higher rates of fuel duty. As an alternative, the IFS also suggested that VED should be graduated according to CO2 emissions for the duration of the vehicle’s life.

The expensive car supplement has also been subject to criticism as an arbitrary way to tax the well-off (PDF). Since the £40,000 figure has not changed since its introduction, questions of fairness have been asked, as car prices have increased significantly since 2017. The IFS argued that the supplement should be disbanded (PDF).

On the other hand, the ‘first year rate’ has been seen as the more “defensible” element of VED (PDF), as it impacts consumers’ purchasing decisions directly.

Changes in the vehicle fleet (particularly the increased uptake of electric vehicles) have led commentators to suggest alternative forms of motoring taxation, mainly the creation of road charging schemes, where charges would vary according to mileage driven. The Transport Committee, which has analysed the potential of a road pricing mechanism, has argued that VED and fuel duty should be replaced by this system. The Resolution Foundation, on the other hand, has said that a reformed VED should remain part of the motoring taxation system (PDF). 


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