Understanding UK car tax in 2025 is essential for anyone planning to buy, lease, insure, or operate a vehicle. With significant changes affecting electric vehicles and luxury cars, staying informed about Vehicle Excise Duty (VED) rates can save you hundreds of pounds annually. This comprehensive guide covers everything you need to know about car tax in 2025, from new regulations to money-saving strategies.
What Is UK Car Tax in 2025?
Vehicle Excise Duty (VED), commonly known as car tax or road tax, is a mandatory annual fee required to legally drive or keep a vehicle on UK public roads. The biggest update to Vehicle Excise Duty (VED) this year is that electric cars are no longer exempt and need to pay it for the first time.
Major 2025 Changes
The UK government has implemented several significant changes to encourage greener driving while generating additional revenue:
Electric Vehicle Changes:
- Electric vehicles have been exempt from road tax for many years but changes being introduced on 1 April 2025 mean EV owners will now pay in the same way as petrol or diesel cars
- For buyers of new electric cars (from 1 April 2025) the first year VED rate will be £10 rising to the standard rate of car tax in the second year of ownership
Luxury Car Supplement:
- New electric and zero emission vehicles registered on or after 1 April 2025 with the list price exceeding £40,000 attract the standard rate, plus the expensive car supplement for the first 5 years
2025 First Year Tax Rates (New Cars)
When purchasing a new vehicle, you pay an upfront first year tax based on COâ‚‚ emissions. Here are the current rates for 2025:
| COâ‚‚ Emissions (g/km) | First-Year Tax Rate |
|---|---|
| 0 (Electric vehicles) | £10 |
| 1-50 | £10-£25 |
| 51-75 | £120 |
| 76-90 | £150 |
| 91-100 | £180 |
| 101-110 | £220 |
| 111-130 | £270 |
| 131-150 | £645 |
| 151-170 | £1,040 |
| 171-190 | £1,565 |
| 191-225 | £2,135 |
| 226-255 | £2,745 |
| Over 255 | £2,745 |
All first-year car tax rates have been confirmed for 2025, and any electric car registered on or after 1 April 2025 will pay £10 for its first year on the road until the 2029-30 tax year.
Annual Road Tax Rates After Year One
From the second year onwards, most vehicles pay a standard annual rate regardless of their emissions:
Standard Annual Rates:
- Petrol and Diesel cars: £190 per year
- Electric vehicles: Zero-emission cars will be placed in the lowest tax rate, with a VED of £10 for the first year and £165 per year thereafter
- Alternative fuel vehicles (hybrid): £180 per year
Luxury Car Supplement
Vehicles with a list price exceeding £40,000 pay an additional premium car supplement:
- Standard supplement: £390 per year for five years
- Total for luxury EVs: EV drivers with an ‘expensive car’ will pay £620 per year for road tax (£165 standard + £455 premium supplement)
Used Car Tax Considerations
Used vehicles registered before April 2017 follow different tax bands based on COâ‚‚ emissions. These older tax bands can sometimes result in significantly lower annual costs, making certain used vehicles more attractive from a tax perspective.
Key Points for Used Cars:
- Tax rates vary widely based on registration date
- Some older, efficient vehicles may qualify for very low tax bands
- Always verify the exact tax band before purchasing
- Cars that are over 40 years old are exempt from VED
Company Car Tax and Benefit-in-Kind (BiK) 2025
Company car drivers face Benefit-in-Kind tax based on the vehicle’s list price, COâ‚‚ emissions, and fuel type. Tax bands run from 3% to 37% for the current 2025-26 tax year.
2025 BiK Rates by Vehicle Type:
Electric Vehicles:
- In April 2025, the Benefit in Kind (BiK) rate for company car tax on electric cars increased from 2% to 3%
- The rate will increase by 1% every year until 2028, when it reaches 5%
Petrol and Diesel Vehicles:
- Range from 22% to 37% depending on COâ‚‚ emissions
- All cars that emit less than 160g/km of CO2, including electric and hybrid cars, received a 1% BiK rate increase
BiK Tax Calculation
To calculate the company car or BIK tax, multiply the P11D value by the BIK percentage banding, then multiply that figure by your tax band (20% or 40%). This will give you your annual tax.
Example Calculation:
- Electric car list price: £35,000
- BiK rate: 3%
- Taxable benefit: £1,050
- Tax owed (20% taxpayer): £210 per year
- Tax owed (40% taxpayer): £420 per year
Insurance Premium Tax (IPT)
Vehicle insurance includes Insurance Premium Tax at 12% on all policies. This tax is automatically included in quoted premiums, but understanding it helps when comparing insurance costs.
IPT Considerations:
- All insurance premiums include 12% IPT
- Business vehicle policies may have different IPT rates
- Gap insurance and extended warranties may attract different IPT rates
Vehicle Rental Tax Implications
When renting vehicles, several taxes apply:
VAT on Rentals:
- 20% VAT included in rental rates
- Business users may reclaim VAT depending on usage
- Long-term rentals may have different VAT treatment
Insurance and Charges:
- Rental insurance includes IPT where applicable
- Congestion charges and Low Emission Zone fees may apply
- Always confirm what taxes and charges are included in rental quotes
Money-Saving Strategies for 2025
For Private Buyers:
- Consider electric vehicles before exemptions end completely
- Avoid luxury car supplement by choosing vehicles under £40,000 list price
- Research used car tax bands for potential savings
- Time purchases carefully to benefit from first-year rates
For Company Car Users:
- Choose electric vehicles for lowest BiK rates
- Consider salary sacrifice schemes for tax-efficient EV access
- Evaluate total cost of ownership including tax implications
- Review annual mileage as it affects BiK calculations for some vehicles
For Businesses:
- Plan fleet replacements around tax year changes
- Consider whole-life costs including tax when purchasing
- Evaluate leasing vs. purchasing based on tax implications
- Use capital allowances effectively for business vehicles
Additional Costs to Consider
Beyond VED and insurance taxes, budget for:
Mandatory Costs:
- MOT testing: £54.85 annually (after three years)
- Servicing and maintenance
- Fuel costs and potential congestion charges
Optional but Recommended:
- Extended warranties
- Breakdown cover
- Regular vehicle cleaning and maintenance
Planning for Future Changes
The UK government continues to use taxation to encourage cleaner vehicles. Future considerations include:
Upcoming Changes:
- Further EV tax increases planned through 2028
- Potential changes to fuel duty
- Evolving congestion and emission zone charges
- Possible road pricing mechanisms
Strategic Planning:
- Monitor government announcements for tax changes
- Consider timing of vehicle purchases around tax year boundaries
- Evaluate emerging vehicle technologies and their tax implications
Conclusion: Navigating UK Car Tax in 2025
The 2025 changes to UK car tax represent a significant shift towards taxing all vehicles more equally while maintaining incentives for cleaner options. Electric vehicles remain the most tax-efficient choice, despite losing their complete exemption.
Key Takeaways:
- Electric vehicles still offer substantial tax advantages
- Luxury car supplements affect all vehicles over £40,000
- Company car tax continues to favor electric vehicles
- Planning and research can lead to significant savings
Whether you’re buying your first car, managing a company fleet, or considering an electric vehicle, understanding these tax implications is crucial for making informed financial decisions. The landscape continues to evolve, making regular review of your vehicle tax strategy essential for optimizing costs.
By staying informed about current rates and future changes, you can make vehicle choices that minimize your tax burden while meeting your transportation needs. Remember to factor in all costs, including insurance, maintenance, and potential congestion charges, when evaluating the total cost of vehicle ownership in 2025.