Explained: Car tax – everything you need to know

Almost since the establishment of a road network, there have been taxes to fund it. From toll bridges and turnpikes to tithes, someone’s got to pay for all that infrastructure, and cars need a lot of infrastructures. In Britain, the route for funding took the form of an annual tax called Vehicle Excise Duty, or VED, as far back as 1888.

Proof that you have paid your VED is issued in the form of a licence to use the public highway, which used to be a paper disc displayed within the windscreen area or in a holder. Tax discs were no longer issued from 1 October 2014, as ANPR cameras provided sufficient coverage for enforcement.

Despite all these changes, and a predominantly online system for taxation and other vehicle records, most drivers still call VED road tax or car tax, and chances are it’s one of the first things you think about when shopping for second hand cars.

Why is road tax important when buying a used car?

As if you’re not paying enough for things already, VED (road tax) is paid whether you drive 2,000 miles a year or 20,000 miles, and your car needs to be taxed even if it’s parked on the road or driveway and not going anywhere. It is partly used as a mechanism to verify the presence of a valid MoT and insurance, though you can now check MoT and tax status online.

Depending on the age of the car, the tax paid could be based on engine capacity or emissions, and the emissions-based charges changed dramatically in 2006 and again in 2010 and 2017. There are two extremes to watch out for; cars with emissions below 100g/km, and cars with emissions over 225g/km registered after 2006.

How has vehicle excise duty changed?

For many years the vehicle licence was a fixed rate except for vintage cars and motorbikes, only varying between classes of vehicle. In 1999 a move towards ‘greener’ incentives began, with a lower rate for cars under 1100cc. Cars over 1100cc paid 55% more tax per year; the threshold for lower capacity, lower rate tax was raised to 1200cc and then, in 2001, 1549cc.

2001’s reforms went further, introducing bands based not on capacity, but on stated CO2 emissions for cars registered after March 2001. The banding system rewarded greener vehicles and penalised high polluters, and the number of bands expanded from A to K –  Band A applies to vehicles below 100g/km CO2 and introduced zero-rated, ‘free’ road tax, while the highest, band K, was anything over 225g/km.

In 2006 the bands expanded to L and M, encompassing vehicles up to and over 255g/km. These two bands pay the highest annual VED of any vehicle registered in the UK and apply to cars registered between 1 March 2006 and 31 March 2017.

Cars registered from 1 April 2017 pay a fixed vehicle excise duty (currently £165, £155 for alternative fuels, and £0 for electric cars) after two years, and also attract an emissions-based first-year payment (first introduced in 2010) plus, for cars over £40,000 list price, five years of an extra £355 a year.

Free road tax? How does that work?

Band A vehicles – once called ‘ultra low emission vehicles’, though at 100g/km that hasn’t aged well – are zero-rated. Cars such as the 2010 Citroen C3 Mk2 Airdream+ not only qualified for free vehicle duty, but they were also exempt from the congestion charge, and cheaper to run as company cars. Those exemptions have gone, but the zero-rated Band A remains for cars registered before 1 April 2017.

There are two significant exemptions for vehicle excise duty; historic, and disabled tax classes. The former applies to vehicles over 40 years old, replacing a short-lived 25 year rolling exemption in 1995-1997 that itself replaced concessionary rates for pre-1974 cars/pre-1933 motorbikes. Historic vehicles are exempt from ULEZ charges, but not the Congestion Charge.

The disabled tax class applies to specific users in receipt of relevant benefits and support, and can be applied to any vehicle but does not transfer to a new keeper, and any vehicle on the disabled tax class needs to be returned to the original rating when sold. ULEZ charges apply to cars in the disabled tax class, but holders of a Blue Badge can apply for a 100% discount on the Congestion Charge.

How have VED changes affected used car habits and dealers?

The biggest impact has been the cost of bands L and M on used cars from the mid-2000s. Manufacturers and buyers responded swiftly to the high rate, so you’ll find very few cars after 2010 that occupy those bands, but big petrol SUVs, sports and luxury cars became very undesirable, and remain unpopular and hard to sell now; in real terms, the VED on these cars is almost twice that of the band below.

The same incentives mean that as technology improved, economical and lower-emissions cars sold in huge numbers, so there are a lot of zero-rated or very cheap cars to tax registered between 2010 and 2017 to choose from. Many of these are diesel that may have used cheat systems to achieve those low figures, but they’re undeniably very cheap to run if maintained properly.

What happened to the tax disc?

To prove you have paid your vehicle taxes, a licence is issued. Between 1920 and 1936, these taxes went directly to the Road Fund, leading to the term ‘Road Fund Licence’ for the paper discs issued for display on the vehicle with an expiry date; many websites and articles still refer to road fund licence for the tax disc or vehicle excise duty.

The tax disc itself disappeared in October 2014, along with a whole ritual of visiting Post Offices, peeling a perforated sheet and sticking a disc in the window with some sort of holder. The disappearance of the tax disc meant used car dealers could no longer sell a car that was taxed – making it harder for uninsured drivers to appear legal on the road. It also eliminated crude paperwork fraud, like cutting the expiry date of a stolen tax disc off to make a fake one for an untaxed car. A buyer of a taxed used car could return the disc for a refund, something traders of cheap vehicles were happy to exploit.

Since 2014, when a car changes owners it ceases to be licenced, and the new owner must tax it or make a SORN (statutory off-road notification) right away. A refund of outstanding tax, whole months only, is issued for vehicles that have been taxed for 6 or 12 months, but many drivers take advantage of monthly direct debits now. It’s worth noting that while tax is refunded in whole months, and always starts from the beginning of the month it’s paid in (even if you tax a car on the 27th), making a SORN applies immediately.

Should I let road tax influence my used car choices?

In the grand scheme of things, it’s far from the biggest monthly expense when running a car, but it’s an easy cost to see, and a cost that feels like you get nothing back unlike fuel, parts or servicing. When considering a second-hand luxury car or SUV, we’d weigh up the condition and quality very carefully; if the post 2006-model costs a couple of hundred more a year to tax, but the pre-2006 model needs £1000-worth of new tyres and brakes, why reject the better car. You’ll spend £30/month more on VED at most.

When it comes to smaller cars and lower tax bands, there are clear advantages – not because you save a few quid, but because those cars are among the most economical you’ll find. They’ll be easy to sell when you want to change, as well.

For most cars registered after 2017, don’t give it a second thought for now. The worst you’ll have to pay is £355 extra for a couple of years if buying a premium model regardless of emissions; it’s still less than the owners of polluting 2006-on cars pay. However, those cars do have their emissions recorded so future legislation may penalise them. It’s reassuring to know that after 25 years of evolving the ‘greener’ approach to taxation has yet to apply a harsher tax to cars already registered.