£1.3bn black hole for treasury as a result of greener cars on our roads

Posted by Tom Line in Personal Finance on 5 May 2015 - Tom worked as a Credit Analyst at checkmyfile until 2015

Motorists could see an increase in their road tax bills in the future, as the Treasury is receiving less due to the rise in ownership of greener, more fuel efficient cars. The current UK road tax system applies to eligible vehicles heavily favours those with low CO2 emissions. Car manufacturers have invested heavily in producing efficient cars in recent years and as a result, Vehicle Excise Duty (VED) receipts received at the Treasury are reducing.

The Society of Motor Manufacturers and Traders (SMMT) has released figures showing that more than two-thirds of new cars are exempt from road tax in their first year. Currently, for a vehicle to be excused from Vehicle Excise Duty in the first year of operation it cannot produce more than 130g of CO2 per kilometre. After the first year, any car producing below 100g of CO2 per kilometre is exempt from paying any road tax at all. Vehicles producing more than this are charged road tax on a scale, depending on their efficiency.

The report released by the SMMT states that the average new car produces 124.6g of CO2 per kilometre. A car producing this amount of carbon dioxide is taxed at £110.00 per year. Vehicles producing 101-110g/km and 111-120g/km are charged £20 and £30 per year respectively.

As a result of cars becoming more fuel efficient, the report highlights that the Treasury may see a reduction in VED receipts amounting to £1.3bn. In 2013, £5.7bn was received from motoring taxes and this could fall to £4.4bn in 2025.

It is thought that the current boom in the ownership of efficient cars will cause the government to review the current tax arrangement in order to look into how revenue from this division can be increased.

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