Tax by tax, spend by spend

Vehicle excise duty

The text on this page has been updated with information available at the time of the October 2024 Economic and fiscal outlook. We are aware of a technical issue with our charts that means they currently show the March 2024 forecast. Please access the data from our October 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 £2,745. More information can be found online. From April 2025, rates for drivers registering new cars emitting up to 50g/km CO2 will increase to £110 and cars emitting between 51 and 75g/km CO2 will increase to £130. First-year rates for cars emitting 76g/km CO2 and above will double from current levels in April 2025.

For the second-year payment onwards, most drivers pay a fixed (“standard”) rate of £190 regardless of the CO2 emissions of their vehicle. Some drivers may also have to pay an expensive car supplement if they purchase 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 of £10 in the first year and the standard rate from the second year of registration onwards. A similar change applies to zero-emissions vans and motorcycles. The expensive car supplement exemption for EVs is also due to end in 2025.

We forecast that VED will raise £8.2 billion in 2024-25. That represents 0.7 per cent of all receipts and is equivalent to £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 the intention 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.
  • In Autumn Budget 2024, the Government announced an adjustment to first-year VED rates for newly registered cars, increasing the charge to £110 for cars emitting less than 50g/km CO2, £130 for those emitting 51 to 75g/km CO2, and all other band rates doubling from April 2025. Rates for zero-emission cars will remain frozen at £10 until 2029-30.

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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 2024 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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