Drivers thinking about buying a new family car might want to check the price tag, or risk being hit with a hefty charge on top.
Those who buy a car with a list price of more than £40,000 have to pay an extra £390 a year in road tax, also known as vehicle excise duty (VED). This is a flat rate that is payable for five years starting from the second time the vehicle is taxed, resulting in a total tax add-on of £1,950.
When Lucy Cafferkey and her husband, Tom, bought a Mercedes in 2022 they intentionally chose a model that would not trigger the charge.
But manufacturing delays meant that by the time the car was delivered, seven months later, the on-the-road price of £38,405 had risen to £40,555. Although Mercedes honoured the initial price that the couple paid for the car, its value remained above £40,000 and triggered the expensive car supplement, landing them with a £1,950 bill.
The threshold includes extras and trim options, and haggling down the price paid to a dealer does not exempt a buyer from the tax.
Cafferkey asked the Mercedes-Benz dealership in Loughton, Essex, if it would cover the surcharge, but it declined. She said: “We made a conscious decision when buying the car to make sure it was under the threshold, and we were pushed over it through no fault of our own.
“There was a general lack of communication from the dealership about delays and changes, not only in the value of the car but also its emissions, which also affect the tax you pay. The threshold needs to be increased.”
Mercedes said: “We are sorry to learn of the difficulties Mr and Mrs Cafferkey have experienced with the purchase of their car. Our customer services team will contact them to help bring their concerns to a close.” After Money got in touch with the company, it agreed to give the Cafferkeys three years’ free servicing.
£7.4bn was raised in road tax in the 2022-23 tax year
MERCEDES BENZ
Why so taxing?
VED is the tax paid by drivers to keep their cars on public roads. The rate you pay depends on the type of vehicle you have, when it was registered and its emissions performance.
The tax raised £7.4 billion for the government in the 2022-23 tax year, a figure that is expected to rise to £9.4 billion by 2027-28 according to the Office for Budget Responsibility.
For cars registered after April 2017, drivers pay a first year tax rate based on the vehicle’s CO2 emissions — lower emissions qualify for a lower rate of tax, with the first annual payment ranging from £10 to £2,605 for petrol and most diesel cars.
From the second year the tax reverts to a standard universal rate of £180 a year and only zero emission vehicles are exempt. Drivers who bought a car worth more than £40,000 will pay the £390 surcharge on top from years two to six — a total bill of £570 each year.
The rate of VED is due to rise again in April, and so will the expensive car supplement.
In a few weeks, the standard rate will rise by £10 to £190 and the expensive car supplement will increase to £410 a year, making an additional tax bill of £2,050 over five years.
Despite that, the threshold at which you pay the additional levy has not moved from £40,000 since it was introduced in 2017.
Robert Salter from the accountancy firm Blick Rothenberg said: “It is another example of fiscal drag. If you buy a second hand car which is under the expensive car supplement but it had a list price of more than £40,000 when it first went on the road less than six years ago, you will still have to pay the surcharge.
“So it also affects people who are not buying brand new super expensive vehicles.”
The Institute for Fiscal Studies has previously branded the surcharge an “odd and arbitrary way to tax the well-off” which penalised those choosing to buy an expensive car, rather than those with high wealth or spending more generally.
The idea behind the levy was that those who could afford more expensive cars could afford to pay more towards road tax than standard drivers. But new car prices have risen sharply and a £40,000 price tag is no longer the hallmark of luxury it once was.
Rising car prices and frozen tax thresholds are dragging more drivers into this higher band. The average on-the-road price of a car has risen from £36,798 in 2020 to £52,462 today, according to the motoring website Which Car?. The average family SUV cost £33,415 four years ago, but has risen to £40,331 — tipping it over the surcharge threshold.
Rod Dennis from the RAC said: “There is perhaps an argument for the government to look again at the value of the new cars that the supplement applies to, given higher purchase costs, especially if many more cars are creeping above the £40,000 threshold. This is something our members have started to raise with us.”
Adding to the problem is the rise in the use of car finance, which means that people tend to buy new vehicles every three or four years. The surcharge runs between the second and sixth year of the car’s life, after which tax reverts to the standard rate for the vehicle’s emission band. That means that each time a driver buys a new car, the cycle begins again.
Electric vehicles are exempt from road tax and the expensive car supplement, but this will change from April 1, 2025. Electric car drivers will then pay the same tax rates as everyone else, including the expensive car surcharge.
The Treasury said: “About 80 per cent of all new cars have a list price below £40,000, so the government considers this threshold to be a suitable way of distinguishing the premium end of the market. It means that those who can afford the most expensive new cars pay more than most drivers.”
