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How much tax will you pay on your new car?

WHEN you buy a new car, there are several forms of taxation you’ll need to consider. It’s good to be aware of these because they’ll form an important part of the car’s running costs.

Vehicle Excise Duty (VED, also known as road tax) is especially important because failing to pay it means your car isn’t legally allowed on public roads and you’ll be liable for fines.

You could even have your car confiscated if the police pull you over. You can quickly perform a vehicle tax check online. For the majority of private motorists, road tax is a relatively manageable cost and it’s easy to make road tax online payments.

Another form of tax can, however, become a much more significant sum if you accept a company car from your employer because the government heavily taxes this perk under a scheme called Benefit-in-Kind (BiK). In this article, we explore and explain the various forms of tax you need to consider when buying a new car.

New car VAT

While it’s not something motorists often think about, the most substantial chunk of tax is usually paid when you buy a new car. This is because of VAT, a 20per cent tariff on all new goods imposed by the government. When you look at the price of new cars, VAT is already included in the total cost of the car, usually referred to as the RRP or OTR price (Recommended Retail Price or On-The-Road price respectively).

First tax payment

Cars registered since 1 April 2017 have been liable for an initial tax payment that varies according to the car’s CO2 emissions. After the first year, VED becomes a flat rate. Like VAT, the first year’s tax is usually rolled into the advertised price for the car you’ll see online and in the dealership.

The way VED payments are structured was changed in 2017 to incentivise the purchase of more efficient vehicles that are less polluting. Buy a car with zero emissions and there’s no tax in the first year, while cars in the 1-50g/km and 51-75g/km range are liable for £10 and £25 respectively.

However, the most polluting cars emitting over 255g/km of CO2 are liable for a first tax payment of more than £2,000.

Vehicle Excise Duty (VED)

VED, also known as ‘road tax’, is an annual fee that motorists must pay to use the UK road network. Before 1 April 2017 this was split into numerous bands based on CO2 tailpipe emissions.

After this date, the system was simplified into three bands. Zero-emission vehicles pay £0 in annual VED. All other petrol and diesel vehicles are liable for a £145 annual fee, which is reduced to £135 for hybrid vehicles and those running on bioethanol or LPG.

If a car costs more than £40,000 a VED surcharge of £320 is added in each of the first five renewal years.

If you own a car you want to keep in storage and not use on the public road, you can cancel car tax by making a SORN (Statutory Off-Road Notification), which lasts for 12 months.

Benefit-in-Kind (BiK)

Company cars are seen as one of the most desirable perks of employment, but BiK liability can also make them a significant expense for the one million UK motorists who use one.

The amount of BiK you’ll pay is worked out by multiplying the car’s value (listed as its P11D in car brochures and price lists) by a BiK band percentage determined by its CO2 emissions. Your income tax band (20per cent, 40per cent or 45per cent for England and Wales or 19per cent, 20per cent, 21per cent, 41per cent or 46per cent for residents of Scotland) is also factored in.

Which company car you choose can make a big difference to BiK payments. From April 2020, electric cars will fall into a 0per cent BiK band, so cost nothing at all. In contrast, a luxury petrol car with high emissions could cost over £10,000 a year in BiK tax.

Fuel tax

If you have a company car with free fuel, which you also use out of your working hours, you’re probably liable for the company-car fuel benefit.

Therefore, you’ll still need to pay tax to HMRC, even when free fuel can seem like a great perk. It’s worked out by multiplying the BiK band your company car sits in (e.g. 27per cent) by £23,400 (for the 2019/20 tax year) and then multiplying this figure by your tax band – usually 20per cent or 40per cent. For a car in the 27per cent BiK band this means £1,263 in tax, so it may not be worth it if you spend less than this on fuel for private use.

Read more

UK road tax rules for 2020 explained

Company-car tax explained