Car Tax Explained: What It Is And How Much It Costs

Road tax can feel like an annoying additional car running cost. When you’ve finally figured it out and what you need to pay, it changes again!

When you change cars, it’s likely you’ll have a different car tax rate to pay too.

If you’re lost on what you need to pay and how, we’re here to help. In this guide to car tax, we’ll cover what it is, how it’s calculated and how you can pay.

What is road tax/VED tax?

Road tax, AKA Vehicle Excise Duty (VED) is an annual Government tax required from anyone who drives a vehicle on public roads. 

Although most commonly called road tax, the name can be misleading. ‘Road tax’ isn’t actually paying towards roads, and in fact just covers tax for the individual vehicle. If not addressed as road tax, you’ll also find it named VED, vehicle tax, tax disc, and road fund licence. 

The owner of each vehicle is responsible for paying their car’s vehicle excise duty, however anyone can make the payment. 

How is it calculated?

Simply put, current road tax is calculated based on a car’s CO2 emissions and vehicle cost.

Road tax is updated every year on the 1st of April, when new tax rates are announced. However, the road tax you pay is based on the tax system that was in place at the time of the car’s registration. Only inflation will change what you pay.

This means that if you’re buying a new car, you pay based on the system announced in 2017, but updated in April 2021. If you’re buying a used car that was registered prior to April 2017, you pay according to the previous system. 

For 2021, the current system operates with two rates:

• The rate for a new car’s first year.
• A second annual rate determined by the car’s cost.

If your car was registered from 1st April 2017 onwards, this is the tax system you follow. 

New Car First Year Tax

The tax you pay for your new car’s first year is based on the car’s emissions, and comes with the vehicles on the road price (the cost to own and drive it away). This is higher for diesel cars that fail to meet RDE2 emission levels. 

Standard Annual Rate

From April 2021 that standard annual rate is:

• Petrol and Diesel Cars (Under £40K) - £155 per year
• Vehicles with Hybrid Assistance (Under £40K) - £145
• ICE Vehicles/Vehicles with Hybrid Assistance over £40,000 - £490 (for 5 years after the 1st year)
• Hybrids over £40,000 - £480
• Fully Electric Cars - £0

How do I pay?

Road tax itself might seem complicated, but fortunately paying it isn’t. You’ll receive a letter (V11) just before your road tax is due, with details explaining how you can complete your payment.

You can pay your road tax either:

• At the Post Office.
• Online via the Government DVLA website.

The most simple method is usually by paying online through the Gov.uk tax your vehicle page. There, you’ll need a reference number from:

• Your vehicle tax reminder letter.
• Your vehicle log book (VC5).
• The green ‘new keeper’ slip from a new log book.

Or if you don’t have any of these, you can apply for a new log book. 

Alternatively, paying your car tax through eligible Post Offices is just as easy. You’ll need to provide your car’s VC5, your MOT certificate, and in some cases your insurance.

Can I reduce it?

In most cases, it’s pretty tricky to reduce your road tax when you’ve already got your vehicle. However there are some things you can do. 

You can check:

• Your vehicle’s emissions to ensure you’re in the correct tax band. 
• Eligibility for reductions based on your personal circumstances.
• Any entitlements due to the car’s age.

You might also consider paying your road tax in a lump sum. Though spreading out the payment can come in handy, it means paying interest and increasing the overall cost.

Ultimately, the best way to reduce your road tax is to choose your car wisely. If you’ve decided on a more upmarket car above the £40,000 bracket, you should bear in mind the fairly significant increase in road tax. 

Tax on a company car

If you had the lucky opportunity to get a company car, chances are you wouldn’t turn it down. But it’s worth noting that company car tax works slightly differently. 

For company cars, tax is paid in accordance with BIK rates. BIK (benefit in kind) tax is classed as a benefit (or perk) outside of your typical salary, therefore you get charged tax. 

Fortunately, if you’ve got an electric vehicle, company car tax on electric cars is pretty appealing. Electric cars registered in 2020 and 2021 pay 0% BIK tax, and this increases to just 1% for 2021/22, then 2% for 2022/23.

Conclusion

Whatever kind of car you drive, it’s likely that you have to pay road tax. 

One of the times you don’t have to worry too much about it is when you’re leasing. Road tax is often included in the overall lease price, so it’s one less thing to worry about.

If you need more info, we’ve also covered how to claim back car tax, and company van tax if you’re using a van for business.