As a car owner, the annual vehicle tax is just another cost you have to factor in when choosing a car. But where did it all begin and what does it pay for?
What is Vehicle Tax?
Vehicle tax, or vehicle excise duty (also known as car tax, road tax) is the annual tax levied as an excise duty on cars. It must be paid on the majority of cars which use (or park) on public roads in the UK.
Vehicle Tax – A History
The Road Fund – The Beginnings of Vehicle Tax
A tax on vehicles was first introduced in 1888, but it applied to all vehicles, not just motor cars.
However, due to the growing popularity of motor cars, it became apparent that more needed to be done to improve roads. In his 1909 budget, Lloyd George announced that the developing road system across Britain would be self-financing to solve the problem. As a result from 1910, all the proceeds from the vehicle excise duties went to fund the building and maintenance of the road system via the Road Fund.
As cars became more common, the Ministry of Transport was founded in 1919. Shortly afterwards, the Government introduced the 1920 Roads Act to help establish tax collection. As a result, councils became responsible for registering new vehicles and collecting the appropriate excise duty. The money collected was to be exclusively dedicated to the newly established Road Fund.
However, not only was this system unpopular with other ministers from the off, who disagreed with the money being ring-fenced, but it also proved to be unrealistic. That is because as more cars were registered, more extensive roadworks and new roads were necessary. The money accumulated under the Road Fund in the main was used to maintain existing roads, meaning new roads still had to be funded by other Government funds.
Therefore the ring-fencing road tax was abolished. Despite this, major improvements continued to take place with the Government authorising £28 million for the extension of trunk roads in 1929 as well a further £27.5 million five-year programme to be used on classified roads. However, instead of the money coming from a ring-fenced fund, it came from the Government’s Consolidated Funds (i.e. the general coffers).
The 1930s Onwards
By 1930, the Royal Commission on Transport found around two-thirds of road maintenance was being met by local and general taxations.
So in May 1936, Austen Chamberlain announced a new Vehicle Excise Duty (VED), with the money generated going straight to the general Treasury Fund rather than a ring-fenced fund.
More Recent Developments
Since the thirties, the rate of vehicle excise duty has altered depending on changing circumstances. During the nineties, the abolition of vehicle excise duty was discussed, with plans to make up the money lost through an increase to fuel duty. As a result, the onus would be passed to car buyers to invest in more efficient cars.
However, it was decided this would also put additional pressure on those living in more rural areas. As a result, then Prime Minister Tony Blair introduced a system which based the tax paid on the CO2 emissions of a vehicle. Ever since VED has is levied in a system of tax bands based on CO2 ratings with the tiers changing as newer, cleaner engines and electric and hybrid cars become more mainstream.
So What Does VED Pay For?
VED, also known as vehicle tax, does not go directly towards the maintenance or development of roads. Instead, it goes to the general Treasury as first instigated in 1936.
The Treasury fund ultimately does go towards paying for infrastructure, which may include the building of new roads or improvement of existing roads. But it also funds local councils who then decide how to spend the money in their area. So inadvertently your VED will help pay towards road improvements. However, it is not a ring-fenced fund.
Current Vehicle Tax Rates
The current VED is based on the CO2 emissions of a vehicle with a lower rate in the first year. However, the VED also now takes into account the original cost price of the vehicle. So cars which cost over £40,000 when new, automatically have a higher rate of VED applied.
First-year rates: The first-year of tax you pay varies depending on the CO2 emissions of the vehicle. Payments ranging from £0 for 0g/km CO2 emissions to £2,135 for cars that emit over 255g/km CO2.
Standard year (i.e. the second and subsequent years): The VED ranges from £135 – £145 for cars costing less than £40,000.
Any car with a list value above £40,000: This payment varies, dependent on whether your vehicle is petrol or diesel (£465), electric (£320) or alternative which includes hybrids, bioethanol and liquid petroleum gas (£455).
Vehicle Tax Exemptions
Like with every rule there are some exemptions:
- Cars that are forty years or more old are exempt from vehicle tax.
- Any vehicles used by a disabled person is exempt. However, you must meet specific criteria, and the vehicle must be registered in the name of the disabled person.
- If you provide transport for disabled people, then you are also exempt from paying vehicle tax.
- Mobility scooters, powered wheelchairs and invalid carriages with a maximum speed of just 8mph on the road are exempt from paying VED. Although, they must also have a device which limits them to 4mph when on pavements.
The Tax Disc
Do you remember the tax disc? Well, you might be interested to know that it first came into existence in 1921. As part of the 1920 Roads and Finance Act, it became necessary to display a tax disc from 1921 as proof of payment of the excise duty. Failure to do so could result in a fine.
The tax disc remained in use until 2014 when it was no longer necessary due to modern monitoring methods. For instance, the improvement of Automatic Number Plate Recognition made it easier for police to track down those trying to evade paying their VED.