Tax by tax, spend by spend

Vehicle excise duty

This Forecast in-depth page has been updated with information available at the time of the March 2024 Economic and fiscal outlook. We are aware of a technical issue with our tableau charts across the site. Access the data from our March 2024 forecast supporting spreadsheets directly.

Vehicle excise duty (VED) is a tax levied on every vehicle using public roads in the UK and is collected by the Driver and Vehicle Licensing Agency (DVLA). For most cars registered prior to April 2017, the amount of VED due depended primarily on the car’s official CO2 emissions. For cars registered from April 2017 onwards, first-year VED payments are related to CO2 emissions, but subsequent payments are not.

Drivers of relatively fuel-efficient petrol or diesel cars (up to 50g/km CO2) typically pay up to £30 for the year when they first register the vehicle, depending on the car’s official CO2 emissions. Drivers of less fuel-efficient cars pay more, up to a maximum of £2,605. More information can be found online.

For the second-year payment onwards, most drivers pay a fixed rate of £180 regardless of the CO2 emissions of their vehicle. Some drivers may also have to pay a luxury supplement if they drive a car with a ‘list price’ of more than £40,000.

Electric vehicles (EVs) are currently exempt and drivers of EVs pay no VED, but from 2025, EVs first registered on or after 1 April 2017 will be liable to pay the lower rate in the first year (that which currently applies to vehicles with CO2 emissions of 1-50g/km) and the standard rate from the second year of registration onwards. A similar change applies to zero-emissions vans and motorcycles. The luxury supplement exemption for EVs is also due to end in 2025.

We forecast that VED will raise £8.3 billion in 2024-25. That represents 0.7 per cent of all receipts and is equivalent to around £290 per household and 0.3 per cent of national income.

  Forecast methodology

Forecast process

The OBR commissions forecasts of VED receipts from HM Revenue and Customs for each fiscal event. The forecasts start by generating an in-year estimate for receipts in the current year, then use a model to forecast growth in receipts from that starting point. We provide HMRC with economic forecasts that are used to generate the tax forecasts. These are scrutinised in a challenge process that typically involves two rounds of meetings where HMRC analysts present forecasts to the Budget Responsibility Committee and OBR staff. This process allows the BRC to refine the assumptions and judgements that underpin the forecasts before they are published in our Economic and fiscal outlooks (EFOs).

Forecasting models

The forecasting model is based on DVLA data covering the entire vehicle stock, enabling vehicle types to be disaggregated into the many different VED bands.

Receipts are calculated by multiplying the stock of vehicles by the appropriate duty rate. Rates are indexed each year in line with RPI inflation (subject to any pre-announced policies) and rounded to either the nearest £1 or £5, depending on the tax band. Future vehicle stock levels are forecast by applying assumed vehicle scrappage rates to the existing vehicle stock and by adding expected new car sales.

The stock of vehicles paying VED is currently around 32 million, so new car sales make up a relatively small part of the stock each year. New cars also emit less CO2 than the average of all cars, so attract lower first-year VED rates under the current system. The effect of new car sales on future VED rates was more pronounced under the previous system, where lower CO2 emissions attracted permanently lower VED rates.

Main forecast determinants

The main determinants of our VED forecast are those related to the tax base and those that are used by the Government in setting parameters of the tax system.

Main forecast judgements

The most important judgements in our VED forecast are related to the overall size and composition of the vehicle stock, which determines the tax base, and RPI inflation, which determines future duty rates. Since most cars currently on UK roads were registered prior to April 2017, their VED payments are linked to official CO2 emissions – so less fuel-efficient cars are liable to higher VED rates. Alongside those, we need to make several other forecast judgements. These include:

  • Efficiency gains in petrol or diesel vehicles and the shift to hybrids and fully electric vehicles (EVs) – over time a higher proportion of vehicles fall into lower VED bands, putting downward pressure on the VED forecast (although less so under the regime from April 2017 in which only first-year VED rates are affected and less so still under the regime from 2025 onwards that requires EVs to pay VED). We have provided an update on our EV assumption in Box 4.2 of our November 2023 EFO
  • We might adjust the forecast of new car sales if we judge that they are likely to be higher or lower than the raw output from the econometric model. For example, an adjustment could be made to reflect the positive impact of any car scrappage schemes. Offsetting adjustments would then be made to later years to account for these sales being brought forward.
  • Similarly, we might adjust the forecast of scrappage rates if we judge that older vehicles are being scrapped faster or slower than is currently assumed in our model.

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  Previous forecasts

The upward-sloping receipts forecasts since Summer Budget 2015 reflect the new VED banding policy, which reduced the sensitivity of receipts to rising fuel efficiency. Receipts have exceeded our previous forecasts, partly driven by policy changes and, more recently, by higher than expected inflation.

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  Policy measures

Since our first forecast in June 2010, governments have announced several policy measures affecting our forecast for vehicle excise duties. The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Chapter 3 (previously Annex A) of the relevant EFO. These policy costings include:

  • In Summer Budget 2015, the Government introduced the new VED banding policy, making receipts less sensitive to improvements in fuel efficiency.
  • In Autumn Statement 2022, the Government announced to equalise treatment of electric and internal combustion engine vehicles from April 2025.
  • The VED rate on HGVs has been repeatedly frozen in several fiscal events, and most recently in Autumn Statement 2023.

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  Ready reckoners

‘Ready reckoners’ show how our fiscal forecasts could be affected by changes in selected economic determinants. They are stylised quantifications that reflect the typical impact of changes in economic variables on receipts and spending. These estimates are specific to our March 2023 EFO and we would expect them to become outdated over time, as the economy and public finances, and the policy setting, continue to evolve. They are subject to uncertainty because they are based on models that draw on historical relationships or simulations of policy settings. More information can be found in the ‘ready reckoners’ spreadsheet available on our data page.

The table below shows that:

  • higher RPI inflation would increase vehicle excise duty receipts (applying the default indexation policy set out by the Government, we assume that duty rates are indexed in line with RPI).
WordPress Data Table

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Other taxes

Boxes

Within each of our key publications we include topical ‘boxes’. These self-contained analyses are unique to this publication and tend to cover recent developments in the economy or public finances that complement the main discussion of our analyses.

The long-run difference between RPI and CPI inflation

Chart 2D: Housing costs, private rentals, and the RPI-CPI and CPIH-CPI wedges
As as result of the shortcomings with the methodology for calculating the Retail Prices Index (RPI), the ONS's current plans are to address these by bringing the methods and data sources from the Consumer Prices Index including owner occupiers' housing costs (CPIH) into the RPI in February 2030. In this box, we explained how this change would impact our estimate of the long-run difference between RPI and CPI inflation.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In the July 2015 Economic and fiscal outlook, we made a number of adjustments to real and nominal GDP, the labour market, inflation, business and residential investment, and the housing market.

New car emission fines

New car emission fines
In April 2019, the European Parliament and Council adopted new regulations to set mandatory emissions targets for new cars. Ahead of our March 2020 EFO, the Government told us that all of these provisions transferred into UK law on 31 January 2020 under the terms of the EU Withdrawal Act. In this box we considered the effect of this change on the UK public finances.

Updated electric vehicle assumptions and their fiscal implications

Line chart showing electric vehicle share of new car sales
The transition to electric vehicles (EVs) has direct fiscal implications for fuel duty revenues (and, to a lesser extent, vehicle excise duty). In this box we explained why we have revised down our EV assumptions and the impact of this revision on fuel duty and VED revenues.

Anticipating the implementation of ONS classification decisions

We always try to forecast the public finances consistent with how the ONS will measure them once it has implemented its classification decisions, so that our forecasts will be consistent with that eventual treatment. This box outlined the items included in our November 2015 forecast which the ONS had announced, but had yet to implement.

The transition to electric vehicles

Chart A: New car registrations and total care stock by power type
With the sale of new petrol and diesel cars to be banned from 2030, the transition to electric vehicles is a key element in the UK’s path to net zero emissions. This box outlined the recent growth in alternatively fuelled vehicle sales, the fiscal implications of this and the role of policy in the transition.

What does faster take-up of electric cars mean for tax receipts?

Chart 3.D: Electric vehicle new car market share
This box outlined the recent growth in electric vehicle sales and the fiscal implications of this and the role of policy in the transition.

The indexation of excise and environmental duties in our forecast

The indexation of excise and environmental duties in our forecast
Our forecasts for excise and environmental duties assume that rates are indexed in line with default parameters. These parameters are set by the Government and are detailed at each Budget in the Treasury’s Policy costings document. The assumptions represent a source of economy and
policy-related uncertainty in our forecast. In this box, we looked back at how a selection of duty rates moved over the Parliament relative to the default uprating assumptions assumed in the OBR’s first forecast in June 2010.

Climate-related measures in the Budget and Spending Review

Chart 3.C: Climate change scenarios: impact on public sector net debt in 2050-51
Our 2021 Fiscal risks report explored the fiscal risks posed by climate change and the Government’s commitment to reduce the UK’s net carbon emissions to zero by 2050. This box examined the policies announced in the Budget, Spending Review, and Net Zero Strategy in October 2021, and the significant rises in market prices for hydrocarbons since we completed our Fiscal risks report, and how they had changed the risks associated with climate change and decarbonisation.