Budget 2015: What it means for motorists

13th July 2015


The Chancellor, George Osborne, presented his seventh Budget to parliament last Wednesday, in which he announced a number of changes that will impact on UK motorists, including a complete overhaul of road tax regulations and a hike in Insurance Premium Tax (IPT). The changes are outlined below:

Tax Overhaul

Mr Osborne denounced the current vehicle taxation system, where Vehicle Excise Duty (VED) based solely on CO2 emissions, saying that it “isn’t sustainable and isn’t fair.”

Due to the falling emissions of modern cars, Mr Osborne claimed that by 2017, over three quarters of new cars would pay no VED at all in their first year and he announced plans for radical changes.

Under the new system, the first year’s tax for new vehicles registered after April 2017 will still be directly linked to CO2 emissions (see below table), however after the first year vehicles will fall into one of three categories:

  • Zero-emissions (free);
  • Standard (a flat rate of £140 – applies to 95% of cars on the roads today); and
  • Premium (a supplement of £310 a year for cars with a £40,000+ list price).

The changes only apply to new vehicles registered on or after 1st April 2017, whereas existing cars will continue to pay at today’s rate (an average of around £166).

‘Premium’ Car Tax Introduced

For vehicles registered after April 2017, with a list price of £40,000 or more the Government plans to introduce a new ‘premium’ car tax.

One argument in favour of this tax is that it will prevent large-engined vehicle manufacturers from dodging VED by producing hybrid models, another is that tax is more aligned with vehicle value.

Electric Cars remain exempt

Electric vehicles will not be subject to any road tax and this supports the Government’s aspiration to become a leader in electric car technology.

Company Car Tax

Company car tax rates will continue to be based on a percentage of list price, however from 2019 the tax will increase by 3% for cars emitting more than 75g/km of CO2 - up to a maximum rate of 37%. The cleanest company cars will have to emit 0-50g/km of CO2, with further bands at 51-75g/km and 76-94g/km.

Road Fund

In his budget address, George Osborne declared that from 2020 onwards, Vehicle Excise Duty would be ring-fenced to create a “Road Fund” and used as “the investment our roads so badly need.”

Despite four fifths of all UK journeys are made on the roads, Osborne admitted that “we rank behind Puerto Rico and Namibia in the quality of our network.”

He also pointed out that “France has built more than 2500 miles of new autoroute in the past 25 years while the UK had built just 300;” and that “this long-term structural failure to invest in Britain's road network will be addressed by the new fund”.

Until 2020 however, VED will remains in the same pot as all other taxes, so it is unlikely we will see any significant change to road quality.

Fuel Duty

Osborne had promised that fuel duty would remain frozen for the remainder of the year and stayed true to his word, when delivering the budget.

Chief Executive of the Road Haulage Association, Richard Burnett, said:

“The freeze on fuel duty continues the very positive policy of the last government and will give a massive boost to business confidence not only in the road haulage industry but the economy as a whole.”

MOT Changes

Subject to a consultation, the Government is planning to extend the deadline for the first MOT of new cars and motorcycles to four years from three. A move that the Government anticipates will save UK motorists £100 million per year.

Insurance Premium Tax

Insurance Premium Tax (IPT) will be increased from 6% to 9.5% from November this year, which is set to increase premiums across a wide range of insurance covers, including motor insurance.

The news sparked an instant backlash from the insurance industry who warned that it would hit motorists and homeowners hard and could put some people off purchasing insurance altogether.

However, the Government defended the decision, pointing out that the cost of comprehensive motor insurance had fallen by 10% over the past three years and that IPT is still lower than many EU states – including Germany, where it is 19%.

AA Insurance was amongst a number of insurers to respond to this news, saying: “The contention that falling premiums somehow justifies the tax increase is outrageous.”

“It comes precisely at a time when premiums are beginning to rise once again,” explained Janet Connor, managing director.

“The average shop-around premium at the end of the first quarter of 2015 was £530, having fallen from a peak of £742 at the end of 2011, following a significant increase in the number of whiplash injury claims and ‘cash for crash’ fraud. They have not yet fallen back to the £493 which was a typical premium at the beginning of 2010.'

Ms Connor said that the tax increase “hadn't been thought through” and believes it will have unintended consequences, including greater upward pressure on premiums as a whole and people being tempted to attempt to drive without insurance cover.

Increased regulations for Claims Management Companies

The Government also announced that it would improve the regulation of claims management companies, following accusations that firms encourage claims and add unnecessary costs to insurance premiums. There is a proposed cap on their charges and increased regulations planned.

What do you think about the Chancellors announcements? Are you in favour of the planned tax changes? Do you believe motorists are getting a fair deal?

Tell us in the comments section below.

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