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 November 2022 Economic and fiscal outlook.

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 £25 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 £2,365. More information can be found on the gov.uk website.

For the second-year payment onwards, most drivers pay a fixed rate of £165 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. VED information on new or used cars can be found using the Vehicle Certification Agency’s online tool.

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 on 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.

In 2022-23 we estimate that VED will raise £7.2 billion. That represents 0.8 per cent of all receipts and is equivalent to around £260 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 revalorised 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 forecast of new car sales is generated using an econometric regression relating them to household spending on durable goods. The stock of vehicles paying VED is currently around 35 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 composition of the vehicle stock. 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:

  • In-year estimate: year-to-date receipts provide valuable information about the likely outturn for the current year. Judgements are made on whether to push any unexplained shortfall or excess through to our forecasts for future years.
  • 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 or pay no VED at all, 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 the change affecting EVs that will take place from 2025 onwards requiring EVs to pay VED). The shift to fully electric vehicles now appears to be progressing more quickly than we had anticipated, as set out in in Box 3.3 of our March 2022 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

From 2010 to 2013, our forecasts were generally revised down, predominantly due to the regime at the time being heavily dependent on CO2 emissions and therefore sensitive to the rising fuel efficiency of new cars. 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.

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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 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.

Economy categories: National Minimum Wage and National Living Wage, Inflation, Business investment, Residential investment, Housing market, Labour market, GDP by expenditure

Fiscal categories: Housing associations, Receipts, Inheritance tax, Insurance premium tax, Vehicle excise duties, Public spending, Welfare spending, Housing benefit

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.

Fiscal categories: Receipts, Vehicle excise duties, Fuel duty

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.

Fiscal categories: Public spending, Receipts, Vehicle excise duties, Housing associations, Environmental levies

Cross-cutting categories: Classification changes, Data revisions

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.

Fiscal categories: Receipts, Vehicle excise duties, Fuel duty

Cross-cutting categories: Climate change

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.

Fiscal categories: Vehicle excise duties, Fuel duty, Corporation tax, Receipts

Cross-cutting categories: Climate change

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.

Fiscal categories: Receipts, Vehicle excise duties, Environmental levies, Fuel duty

Cross-cutting categories: Forecast process

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.

Fiscal categories: Public spending, Vehicle excise duties, Business rates, Fuel duty

Cross-cutting categories: Climate change