Budget sets out emissions-based road tax system

Vehicle Excise Duty overhaul will also see revenues ringfenced for new Roads Fund to maintain and improve the UK network

Vehicle Excise Duty is to be reformed, with new cars taxed based on emissions and revenues ringfenced for spending on roads maintenance, the Chancellor of the Exchequer has announced.

Chancellor George Osborne unveiled his Summer Budget 2015 on today (July 8)

Chancellor George Osborne unveiled his Summer Budget 2015 on today (July 8)

Under plans set out in the government’s 2015 Budget, new cars will pay emissions-based Vehicle Excise Duty (VED) at a flat standard rate of £140 per year from 2017, which the government said would cover 95% of all cars sold in the UK.

However, the first year rates of VED will vary according to the carbon dioxide emissions of the vehicle, and zero-CO2 emission vehicles — such as electric cars — will pay no VED at all.

And, the Budget states:

“The new VED system will be reviewed as necessary to ensure that it continues to incentivise the cleanest cars.”

Unveiling the new Budget in the House of Commons today (July 8) — the first Conservative budget in two decades — Chancellor George Osborne said road taxes were being revised as the current system “isn’t sustainable and it isn’t fair”.

But he emphasised that the changes would not affect taxation for existing cars — only for new car registrations from 2017.

He said: “From 2017, for brand new cars only, we will introduce new VED bands. The duty in the first year will be set according to emissions, like today, but updated for new technology. Thereafter there will be three duty bands — zero emission, standard and premium.

“For standard cars — that covers 95% of all cars sold in the UK — the charge will be £140 a year. That’s less than the average £166 that motorists pay today. There will be no change to VED for existing cars – no one will pay more in tax than they do today for the car they already own.”

Roads Fund

In addition, the government is setting up a new Roads Fund, into which ringfenced revenues from VED will be paid from 2020/21 in order to fund the maintenance and improvement of UK roads.

“In total we’ll only raise the same amount of revenue from VED in the future that we do today — but that revenue will be secure for the long term,” said Mr Osborne, who explained that the increasing uptake of low emission and low carbon vehicles meant there were fewer vehicles paying any VED at all in the first year.

Mr Osborne said that “productivity means building more roads”, but that despite four out of five UK journeys in taking place by road “we rank behind Puerto Rico and Namibia in the quality of our network”,

Highlighting the Coaltion Government’s £15 billion road building scheme announced last year (see story), he added: “In the last 25 years, France has built more than two and a half thousand miles of motorway — and we’ve built just 300.”

Alternative fuel

The Chancellor’s road tax announcement also came alongside a number of other transport policies in the Budget which could have an impact on air quality, including the extension of the deadline for the first MOT of new cars and motorcycles from three years to four years.

Furthermore, fuel duty is to remain frozen this year, while the government said it will also legislate to apply a reduced rate of fuel duty to aqua-methanol in its 2016 Finance Bill.

It was claimed by a Conservative MP in Parliament last month that the aqua-methanol can be a low emission alternative to diesel fuel as it produces “virtually no poisonous particulates or nitrogen oxides” (see story).

Meanwhile the Climate Change Levy exemption for renewably sourced electricity is to be removed from August 2015, which could potentially affect facilities such as wood waste biomass plants. Details of a transitional period for electricity suppliers are to be discussed over the summer and autumn.

The new VED system will be based on emissions

The new VED system will be based on emissions

And, regarding environmental taxes in general, the Budget states: “The government will not extend the Coalition government’s commitment to increasing the proportion of revenue from environmental taxes to this Parliament, as such a target does not always reflect the success of government policy in achieving environmental outcomes.”


The Chancellor has also set aside an additional £30 million of funding over three years to support the running costs of Transport for the North (TfN), which is to be established as a statutory body with statutory duties for a long term transport strategy for the region.

Working towards the creation of a Northern Powerhouse, the Budget 2015 includes further details of plans to devolve more power to regions in the north, including the election of a Mayor of Manchester with similar powers over the likes of transport and air quality to those of the Mayor of London.

Further devolution deals are also being sought with the Sheffield city region, Liverpool city region, and Leeds, West Yorkshire and partner authorities.


Mr Osborne described today’s announcements as a Budget “for working people” that “puts security first”, but environmental groups have been critical of some policies in the Budget.

Green Party MP Caroline Lucas criticised the axing of Climate Change Levy exemptions for renewable electricity and further funding for road building as “another example of reckless short-term policy making that prioritises the profits of polluters over the public interest in a safe and habitable climate”.

Friends of the Earth senior economics campaigner David Powell said: “Money raised from taxing cars shouldn’t be spent on yet more roads, which will simply encourage more traffic. The Chancellor should boost public transport instead, and make our cities better for walking and cycling to help stop air pollution claiming lives.”


Notify of
1 Comment
Oldest Most Voted
Inline Feedbacks
View all comments
9 years ago

How about also taxing wood burners on their emissions, as compared to gas users? Or start metering the air as well as the water.

Help us break the news – share your information, opinion or analysis
Back to top