How new tax rules affect car buying and leasing

Date Posted 28th April 2017
Read Time 4 min read

The Government have changed the Vehicle Exercise Duty or Vehicle Tax again and it came into effect on April 1, 2017. These changes only affect cars that are registered for the first time after April 1, 2017, meaning any car registered before that are unaffected. So how will these new changes affect car buying and leasing of new vehicles going forward?

What are the changes?

Under the old regime, electric and hybrid cars were exempt from Vehicle Tax because they produce little to no carbon emissions and therefore people were encouraged to purchase them for receiving a tax relief. However, under the new tax regime, only electric cars are exempt. Any car, including hybrids that produce CO2 emissions, will now be taxed.

The first year of the new car being registered, the amount of VED to be paid is dependent upon how much CO2 it emits. The lower the amount of CO2, the lower the tax to be paid. The rate of tax for the first year can range from £0-£2000 for that first year.

The Government have broken the list down to include a more diverse lower end for example, on the old regime, it was measured 1-100g/km of CO2 as the lowest bracket of tax that needed to be paid. Under the new regime, the lowest bracket is 1-50g/km, followed by 51-75g/km and so on. That one single bracket of 1-100g/km is now split into four brackets.

Second year onwards

After the first year, all fuel-powered cars, regardless of their CO2 emissions are equally set. For vehicles running on petrol or diesel, the standard VED will be £140 for a year. For those vehicles running on alternative fuel, there is a £10 discount, so their standard VED with be £130. Electric cars still don’t pay a standard rate of VED.

However, there is a new additional rate of tax under the new regime. Any new car worth more than £40,000 when newly registered with the need to be taxed by an additional £310 for the five years following the first year.

TypeStandard RateValue over £40,000
Alternative fuel£130£440

 After those five years (so in the 7th years of the car being registered) all fuel powered cars regardless of value will pay their standard rate and electric cars regardless of value will pay nothing.

How will that affect buying and leasing?

The way you choose to acquire a car whether it is by buying it outright, through car finance or leasing a car will depend on which option you choose. If you purchase a car outright, the responsibility to tax it for road use is entirely down to you.

If you resort to buying a new car through car finance through options like Hire Purchase and Personal Contract Purchase, you will most likely have to pay the VED yourself on top of your finance payments. This is because you are paying to take ownership of the car and therefore as the legal owner, you must pay the VED.

Leasing options like Contract Hire agreements roll the VED cost into your monthly payments because the legal owner the vehicle will be the lender throughout the process. Because a Contract Hire agreement ends with you handing the car back, you will never legally have to pay for the VED. However, because the lender is paying it, that cost is folded into your agreement, so in effect, you are paying for it, just not separately.

Will these new changes make any difference to buying and leasing? Maybe in one respect. People will aim to purchase cars that are more efficient and produce less CO2 emission in order to save money. Is that a certainty? No, because the only thing that is certain is that you, the customer will decide. Do these changes make you want to go the finance route or do they tempt you to lease a car?

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