What is the luxury car tax supplement? Expensive car VED explained
Electric cars will be subject to luxury car tax from 2025, and the rates for all vehicles are on the up. Here's everything you need to know...
If you’ve bought a new car in the past few years, you might be familiar with the term ‘luxury car tax’, or as it’s more formally known, the expensive car Vehicle Excise Duty (VED) supplement. But it’s not always obvious what this tax refers to and what it means for car buyers — so we’ve rounded up everything you need to know.
Introduced by the Government in April 2017, the expensive car supplement is an additional fee levied on cars that cost more than £40,000 new. It’s part of the VED, or ‘road tax’, that car owners pay annually. Currently, electric cars are exempt from the £190 flat rate (£195 after 1 April 2025) that most newer cars pay each year. However, this is set to change from 1 April when hybrid and electric car owners will have to pay the same rate as drivers of petrol and diesel cars.
The expensive car supplement is an additional fee that’s payable in years two to six of the car’s life for vehicles with a list price of £40,000 or more. It’s important to note that it applies to the total list price of the car, so it will include any optional extras added to a sub-£40k car, and won’t be removed if you get a discount on a £40k-plus vehicle.
You can avoid paying the luxury car supplement by removing one or two options to keep the car’s price below that £40k threshold. It’s also important to check a car’s list price if you’re offered a discount, in case the full price exceeds that threshold.
How much does luxury car tax cost?
Currently, the expensive car supplement rate is £410 a year for the five years following the first tax payment that’s made when the car is a year old. That’s on top of the standard second-year-onwards rate of £190 – which means you’ll be paying £600 a year if you buy a car that costs upwards of £40,000, until the car is six years old.
How much will luxury car tax cost from 1 April?
From 1 April 2025, the expensive car supplement will rise to £425 a year because all VED rates rise each year in line with the Retail Price Index. This applies alongside the standard VED rate, which is rising to £195. This means that you’ll be paying a total of £620 per year from years two to six — that’s a total of £3100 extra in VED over six years.
Although EVs were originally exempt, they too will be affected by the luxury car tax from April, and there has been no sign from the Government that this might be rescinded, despite significant shortfalls in the overall uptake of electric cars.
Under regulations introduced by the previous Conservative government as part of the Zero-Emission Vehicle (ZEV) Mandate, it is required that EVs account for 28% of all new car registrations in the UK in 2025. Despite this, sales continue to lag behind this target, with EVs representing just 21.3% of the current market share, which is less than the 22% target the Government set for 2024.
Many EVs are still subject to high production costs, and, as a result, the majority have starting prices above £40k. In fact, the current average price for an electric car is £59,735. This means that EV buyers will be disproportionately hit by the changes, and new car buyers will be even less incentivised to make the switch to electric power.
This is why, as part of the What Car? EV Manifesto, we’re calling on the Government to remove the luxury car VED supplement on EVs along with other incentives to encourage people to buy EVs.
Does luxury car tax apply to secondhand cars?
Luxury car tax applies to secondhand cars that were registered after 1 April 2017 and that had a list price of more than £40k when new. It will also apply to secondhand EVs registered after 1 April 2025.
While secondhand EVs registered before 1 April 2025 will not be subject to luxury car tax, they will be required to pay the standard VED rate of £195 a year from 1 April.
FAQs
What is a luxury car?
Luxury cars tend to offer superb refinement and comfort, alongside high-quality interiors and the latest technology. However, you’ll have to have a pretty big budget to get your hands on one.
What is the £40k VED rule?
The £40k VED rule, known as the expensive car supplement or ‘luxury car tax’, is an additional rate on cars with a list price of more than £40,000, which is paid alongside the standard rate of annual road tax.
How much VED will I have to pay from April?
From 1 April 2025, the standard VED rate for all cars will be £195 per year after the first year of ownership. Cars with a list price of more than £40,000 will pay an additional £425 from years two to six, a total of £620 a year, or £3100 over six years.
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