Owning a car in the UK isn’t just about upfront cost and fuel—it’s about understanding the taxes tied to how and what you drive. In 2025, with cleaner air zones expanding and CO₂ emissions under scrutiny, Vehicle Excise Duty (commonly known as car tax) is no longer a simple annual charge. It’s a dynamic system that considers emissions, usage, and vehicle value. Whether you’re buying new, switching to electric, or planning a company car, this guide will help you navigate the real tax costs of car ownership today.
What Is Car Tax in the UK? (VED Overview)
Car tax in the UK is officially called Vehicle Excise Duty (VED), and nearly every car on the road needs it—unless it qualifies for an exemption. VED is charged annually and managed by the DVLA, with revenue supporting infrastructure, roads, and emissions targets. As of 2025, the system is increasingly focused on environmental impact, meaning your car’s CO₂ emissions rating directly affects how much you’ll pay—especially in the first year.
There are two parts to VED:
- First-Year Rate (a.k.a. “Showroom Tax”) – Based on the car’s official CO₂ emissions at the time of registration.
- Standard Rate (from Year 2 onwards) – A flat annual fee for most vehicles, adjusted based on fuel type or vehicle status (e.g. electric).
The higher your emissions, the more you’ll pay upfront. But even electric vehicles—once fully exempt—are starting to lose their free-pass status as government policy evolves toward balanced taxation across fuel types.
First-Year vs. Standard VED Rates: What’s the Difference?
In 2025, the VED system is still structured around two key stages:
- First-Year Rate – This is where emissions matter most. A zero-emission vehicle (like a Tesla Model 3 or MG4 EV) will pay £0 in the first year. But if you’re buying a petrol or diesel car emitting over 255g/km of CO₂, your first-year tax bill could be as high as £2,745. The first-year rate is part of the purchase process and often included in your on-the-road price.
- Standard Rate – After the first year, the annual cost is more uniform:
- £190 for petrol and diesel cars
- £180 for hybrids and alternative-fuel vehicles
- £0 (currently) for zero-emission vehicles—though this will change in April 2025
Example comparisons:
- A Ford Puma petrol emitting 128g/km CO₂: £190 standard rate after first year
- A Toyota Prius hybrid emitting 104g/km: £180 standard rate
- A BMW X5 diesel emitting 235g/km: £2,365 first year, then £190 annually
Be aware—VED rates are based on WLTP figures, which are more accurate (and usually higher) than older NEDC ratings, so modern cars may face higher charges even with modest specs.
How CO₂ Emissions Impact What You Pay
The core principle behind VED in 2025 is emissions = cost. The more CO₂ your vehicle produces, the higher your tax liability—especially in year one. This aligns with the UK government’s push toward cleaner transport and its ban on new petrol/diesel car sales from 2035.
Here’s how emissions affect VED:
- 0 g/km (fully electric) – £0 first-year rate
- 1–50 g/km – £10–£30
- 76–150 g/km – £180–£270
- 151–170 g/km – £645
- Over 255 g/km – £2,745
This scale applies only to brand-new cars. If you’re buying used, the tax rate depends on the original registration date and emissions category at that time.
Key point: even plug-in hybrids (PHEVs), which often emit under 50g/km on paper, benefit from much lower first-year VED and ongoing standard rates. This is one reason they’re popular among UK company car drivers and families aiming for long-term savings.
Additional Charges: Luxury Car Tax and ULEZ
Beyond the standard VED system, many UK drivers are caught off guard by two major cost layers in 2025: the luxury car tax and growing urban emissions charges, especially the ULEZ (Ultra Low Emission Zone) scheme.
Luxury Car Tax – £390 Surcharge:
If your vehicle had a list price over £40,000, you’ll pay an additional £390 each year from year 2 through year 6—on top of your standard VED. This applies even to zero-emission cars like Teslas, which previously avoided this charge. For example:
- Tesla Model Y Long Range (List price: £44,990) → £0 VED + £390 surcharge (Years 2–6)
- Range Rover Evoque Diesel (List price: £48,000) → £190 VED + £390 surcharge = £580 annually for 5 years
ULEZ and Clean Air Zones:
If you drive in cities like London, Birmingham, or Sheffield, you may face daily ULEZ or Clean Air Zone (CAZ) charges. In 2025:
- London ULEZ: £12.50/day for non-compliant vehicles
- Expansion now includes most Greater London boroughs
- CAZ zones apply in places like Bath, Bristol, and Portsmouth
ULEZ applies to petrol cars registered before 2006 and diesel cars before 2015. Clean, low-emission vehicles are typically exempt—but you must check your car’s compliance via the DVLA or Transport for London websites.
EVs and Hybrids: Do You Still Pay Car Tax?
In 2025, electric vehicles (EVs) still enjoy some tax advantages, but the window is closing. The government has confirmed that from April 2025, all new and existing EVs will begin paying VED—removing the long-standing exemption.
Here’s what EV and hybrid drivers can expect:
- EVs (battery-electric vehicles):
- Until March 2025: £0 first-year and £0 standard rate
- From April 2025: £10 first-year rate, then £190 standard rate (same as petrol cars)
- Luxury surcharge of £390 still applies to EVs over £40,000
- Hybrids and PHEVs (Plug-in Hybrids):
- Still receive a £10 discount off the standard VED (so typically £180/year)
- First-year rates vary by CO₂, with plug-in hybrids often falling in the £10–£130 range
While EVs will lose their tax-free status, they still benefit from zero ULEZ/CAZ charges and lower running costs overall. For those considering the switch, 2025 may be the last year to enjoy the full spectrum of tax savings before rates normalise.
Private Buyers vs. Company Cars: Tax Differences
The tax system for company cars in the UK works quite differently from private ownership, primarily through the Benefit-in-Kind (BiK) tax. This tax is based on the car’s list price and its CO₂ emissions—making EVs and hybrids extremely attractive to businesses and employees alike in 2025.
Key points on BiK tax:
- EVs attract a BiK rate of just 2% in 2025 (frozen until 2025–26)
- Petrol and diesel cars range from 20–37%, depending on emissions
- Plug-in hybrids fall somewhere in between, depending on electric range and emissions
Example BiK Scenarios:
- Tesla Model 3 Standard Range (list: £42,000) = 2% of £42,000 = £840 added to taxable income
- BMW 3 Series Diesel (emits 135 g/km) = ~29% = £11,600 taxable benefit on a £40,000 car
Additional Costs for Employers:
- Employers pay Class 1A National Insurance on the BiK amount
- Fuel benefit charges apply if the company pays for private fuel
Because of these advantages, many UK drivers opt for salary sacrifice EV schemes, which let them drive a new electric car for far less than a traditional lease—often including insurance, maintenance, and charging bundled in. For 2025, this remains one of the most tax-efficient ways to drive.
Road Usage-Based Pricing: Is Pay-Per-Mile Coming?
With fuel duty revenues expected to decline sharply due to the rise of EVs, the UK government is actively exploring alternatives—chief among them: road usage pricing, also known as pay-per-mile taxation. While no national scheme is in place yet, 2025 marks a key year in consultations and regional trials that could change how all drivers are taxed in the near future.
Why this shift matters:
- Fuel duty accounts for over £25 billion annually—but EVs don’t contribute
- The Treasury is under pressure to create a fair, sustainable system as combustion engine bans approach
- A pay-per-mile system would mean all vehicles—electric, petrol, or diesel—pay based on road use, not fuel type
2025 developments to watch:
- Pilot trials in urban councils to monitor mileage via GPS or telematics
- London’s congestion and ULEZ zones could evolve into broader distance-based pricing
- Policy discussions include caps or exemptions for rural drivers, essential workers, or low-mileage households
If implemented, this would fundamentally change car tax: your actual road usage would determine what you pay, not just emissions or registration status. High-mileage drivers (delivery, sales, or regional commuters) may pay more, while those with short urban trips may save—depending on the model adopted.
For now, this is a “watch this space” scenario—but it could redefine what UK drivers consider normal taxation within the next 3–5 years.
Conclusion
Car tax in the UK has evolved well beyond a flat annual fee. In 2025, what you pay is shaped by emissions, vehicle value, location, and—soon—how much you drive. From first-year CO₂-based charges to luxury surcharges, ULEZ penalties, and upcoming EV reforms, every aspect of ownership has a tax implication.
If you’re buying a car in 2025—new or used—here’s what to keep in mind:
- Always check the first-year and standard VED before purchase
- Beware of the £40k surcharge—especially on well-specced trims or EVs
- Factor in ULEZ compliance, especially if you live in or near an urban zone
- Consider hybrid or plug-in hybrid options if you’re not ready for full EV yet
Ultimately, understanding car tax isn’t just about paying the right amount—it’s about choosing smarter, saving long-term, and avoiding nasty surprises when it’s time to renew, register, or resell.
