New Vehicle Excise Duty (VED) Rates For Business

By RAM Tracking on 19 Dec 2024

Vehicle Excise Duty (VED), commonly known as road tax, is an important consideration for UK businesses involved in vehicle purchasing. Whether you are a fleet manager, a small business owner with company cars, or a large enterprise, the cost of VED can significantly impact your financial planning.

The UK government recently proposed new Vehicle Excise Duty rates, and these changes are set to affect businesses with high-emission vehicles, particularly those emitting over 255g/km of CO2. In this article, we will explain what Vehicle Excise Duty is, the new rates of VED, and how these changes might affect your business.

What is Vehicle Excise Duty (VED)?

Vehicle Excise Duty (VED) is a tax that UK vehicle owners must pay to use their vehicles on public roads. It is primarily based on the vehicle’s CO2 emissions and its value, with the aim of encouraging the use of more environmentally friendly vehicles. The amount of VED payable varies depending on the car’s emissions level, engine size, and, in the case of new vehicles, the date of registration, commonly known as road tax.

Historically, VED has been an important revenue stream for the government, while also acting as an incentive for businesses and individuals to opt for vehicles with lower carbon emissions. In recent years, the UK government has introduced a range of measures to reduce CO2 emissions and promote sustainability, with VED playing a central role in these efforts.

The New Proposed VED Rates: What’s Changing?

In an effort to tackle climate change and reduce the UK’s carbon footprint, the government has announced significant changes to the rates of Vehicle Excise Duty, particularly for vehicles with high emissions.

The key change is the introduction of increased VED rates for vehicles emitting above 255g/km of CO2. Currently, vehicles with CO2 emissions above this threshold are already subject to higher VED rates, but the latest proposals seek to further increase the tax burden on these high-emission vehicles.

The new VED rates will be structured as follows:

1. For vehicles emitting above 255g/km of CO2, the government plans to increase the rate significantly. Currently, the annual tax for such vehicles can be around £2,175, but the new rates could push this figure higher, with some estimates suggesting increases of up to £3,000 or more per year for the highest-emission cars. More high-end models of BMW, Audi or Mercedes, first year tax fees double, A Range Rover could soar to £5490, up from £2745. Even brands like Ford will also be impacted; buying a new Puma can set you back £440, up from £220.
2. Vehicles emitting between 201g/km and 255g/km will see more moderate increases in their VED rates, which will gradually rise each year as part of the government's long-term environmental strategy.

These changes are designed to further incentivise businesses to invest in electric vehicles (EVs) or hybrids, reducing the carbon footprint of company fleets and private vehicle ownership. The government has made it clear that businesses purchasing new vehicles will need to take these changes into account when calculating the total cost of ownership.

Cost Implications for Businesses

The proposed changes to VED rates will have significant cost implications for businesses, particularly those with fleets or a significant number of high-emission vehicles. If your business relies on vehicles with CO2 emissions above 255g/km, you can expect to face substantially higher tax costs under the new system.

1. Increased Operational Costs: The rise in VED for high-emission vehicles will directly impact the annual running costs of your fleet. For businesses with multiple vehicles in this category, the total annual tax bill could rise dramatically.
2. Incentive to Switch to Low-Emission Vehicles: With the new VED rates pushing the cost of running high-emission vehicles even higher, businesses will be incentivised to switch to more environmentally friendly alternatives, such as electric or hybrid vehicles. This could mean additional upfront costs for businesses making the transition to greener fleets, but it also opens up the potential for tax incentives and grants, which could offset some of the initial investment.
3. Impact on Depreciation: As VED rates increase for high-emission vehicles, their residual value could decline. Businesses purchasing these vehicles may find that they depreciate faster, as the higher annual tax burden reduces their attractiveness to potential buyers. This will affect the total cost of ownership and the resale value of these vehicles.
4. Long-Term Sustainability and Compliance: The changes to VED rates are part of the UK’s broader commitment to reducing its carbon footprint and achieving net-zero emissions by 2050. Businesses that continue to rely on high-emission vehicles may find themselves at a competitive disadvantage, especially as public and consumer expectations shift towards more sustainable practices. In the long term, it may be more cost-effective for businesses to adopt lower-emission vehicles to stay in line with both government regulations and societal expectations.

Planning for the Future: What Businesses Should Do Now

Businesses involved in vehicle purchasing need to begin planning for the potential cost increases due to the new VED rates. Here are some steps to consider:

• Review Your Fleet: Evaluate the emissions levels of the vehicles in your fleet. If many of your vehicles have emissions above 255g/km, it may be time to explore alternatives, such as electric vehicles or low-emission hybrids, which could help you avoid the increased tax burden.
• Consider Electric Vehicles (EVs): The UK government is providing various incentives for businesses to adopt EVs, such as grants and tax relief for purchasing electric vehicles. With the new VED rates potentially making traditional petrol and diesel vehicles more expensive, businesses should consider transitioning to electric options to reduce long-term costs and stay compliant with environmental goals.
• Budget for Increased Costs: Prepare for the financial impact of the proposed VED increases by factoring them into your annual budget. By assessing the long-term cost of vehicle ownership, you can make more informed decisions when purchasing new vehicles for your business. Over half of fleets allow their drivers to trade-up with their own money but this does not take into account the VED fees. It's estimated that a third of fleets have not increased their monthly rental bandings in the last 2yrs, with more drivers opting to fund the extra leasing cost themselves, to drive their preferred cars. Introducing a formal company car policy to stem the potential cost taking into consideration value and emmissions should be implemented.
• Install Vehicle Tracking and Dash Cams: If you do purchase high-end vehicles, the insurance premiums can also be costly, so by installing vehicle tracking and dash cams covering location tracking if stolen or providing evidence in incidents can significantly reduce your insurance costs. The added value also lies in better driver behaviour which will reduce fuel costs and lower maintenance through less wear.
• Stay Informed: The UK government regularly updates tax policies, so it is essential for businesses to stay informed about any future changes to VED rates. This will allow you to adjust your strategy and mitigate any unexpected increases in costs. 

Conclusion

The new proposed Vehicle Excise Duty rates will have far-reaching implications for UK businesses involved in vehicle purchasing. With increases in VED for high-emission vehicles, businesses will need to plan ahead and adapt to the changing landscape. By considering the potential cost implications and exploring more sustainable vehicle options, businesses can not only reduce their environmental impact but also stay ahead of future regulatory changes.