The current vehicle excise duty (VED) or ‘road tax’ system taxes vehicles different amounts depending on how much CO2 they emit. The snag for the government in encouraging people and businesses to drive green vehicles is that low-emissions hybrid and plugin cars and vans have become so popular in the last few years that the motoring-generated piggybank isn’t as full as they’d like. At the same time, people who drive expensive or more polluting cars aren’t being penalised enough in HMRC’s view.

Which vehicles are affected by the new road tax rates?

From April 1st 2017, all new cars, light commercial vans, minibuses and some other vehicles such as ambulances will be taxed through a new VED system. If you buy or reserve a car with a registration date up to March 31st 2017, it’ll be taxed under the current CO2-based system. Cars registered between 01/04/2001 and 31/03/2017 will not be retrospectively affected by the new VED bands, so used car buyers needn’t spare it a second thought.

How are road tax rates changing from April 1st 2017?

Zero-emissions cars and vans won’t pay any VED in the first year or subsequent years, but from 01/04/2017 even ultra-low emissions vehicles (ULEV) that were once treated to cheaper tax rates will have to pay something in the first year, determined by their CO2 emissions, followed by a standard rate of £140 for year 2 onwards.

Want some examples? Okay, here goes.

A Toyota Prius Plug-in Hybrid 1.8 VVT-I CVT emits 49g/km of CO2 and currently enjoys free road tax, but under the new system, the first year will cost £10 and each year after that will cost £140.

Currently taxed at £30 annually from year two onwards, a Vauxhall Corsa Sri 1.4 (75PS) ecoFLEX 5-speed manual that emits 118g/km CO2 and is registered on or after 01/04/2017 will cost £160 in tax for the first year and the same £140 per year after that.

A 4WD Range Rover Evoque TD4 Diesel 6-speed manual 180hp in SE Tech trim with an OTR price from £35,600 emits 125g/km CO2, which currently means its standard road tax rate is £110. This model registered on or after the magic date of 01/04/2017 will be subject to £160 for the first year followed by, you guessed it, £140 for year two onwards.

More luxurious vehicles, beware

Upgrade your Evoque to HSE Dynamic trim and the vehicle’s road tax for year two and each subsequent year will jump from £140 to £450. This is because the government has decided to charge a £310 Additional Rate for years 2 to 6 for ‘premium’ cars with list prices over £40,000, no matter how green they are. Even zero-emissions vehicles like the all-electric Tesla will be caught in this net.

People and businesses who buy their vehicles outright and hang onto them for a while will be slightly happier knowing that the rate for year 7 onwards will fall back to the Standard Rate of £140 that all other cars pay.

The effects on leasing/contract hire prices

Anyone who leases their car or van on business or personal contract hire (PCH) typically opts for a deal spanning 2, 3 or perhaps 4 years, so the premium rate reverting back to the standard rate from the 7th year onwards is irrelevant for them.

Swings and roundabouts

Vehicle Excise Duty (VED) ‘road tax’ is included in business and PCH prices and the ‘funders’ behind leasing contracts, such as Lex Autolease, Arval and Hitachi, won’t want to take the hit. Monthly prices will therefore likely be increased to reflect the new road tax rates, with hybrids, cars emitting less than 130g/km CO2 and those costing £40,001 or more being affected the most. There will definitely be some winners and some losers. For example, a Peugeot 208 1.2 PureTech (82) Allure currently costs £40 in tax over three years and will cost £420 under the new rates, but a SEAT Alhambra 1.4 TSI (150) will only see its 3-year tax bill increase from £435 to £480.

Residual values

Car leasing deals are partly calculated based on residual values, which means how much a car will be worth in the future compared to its original price. With £40,001+ cars set to become less desirable on the used market after being returned by leasing customers after 2, 3 or 4 years, this fall in residual values will also likely contribute towards leasing prices rising slightly.

It’s all about the date

If you’ve ordered a car or van through business leasing or personal contract hire (PCH) and it’s definitely going to be registered and delivered before April 1st 2017, the price agreed won’t change. However, if the registration and delivery dates are currently unknown, or you know for sure that your new vehicle will be arriving after this date, it’s likely that the funder will look to tweak the monthly rental prices to reflect the increased road tax. Leasing customers concerned about the road tax situation regarding a car or van they’ve ordered should contact their account manager for more information.