How does car tax work, and why is mine so much more than my neighbour's?

Two neighbours with what looks like the same car can pay very different amounts, and almost always for one of three reasons: the cars were first registered under different rules, one is in its first year and the other is not, or one cost enough when new to attract the additional rate. Once you know which of those applies, the number stops being mysterious. The tax disc disappeared in 2014 but the system underneath became more complicated, not less.

Safety

Step by step

1. Find the vehicle's date of first registration.It is on the V5C and in the GOV.UK vehicle enquiry service. This is the single most important variable, because the tax system has been restructured several times and a vehicle stays under the rules that applied when it was first registered — for its whole life, not just for the first few years.
2. Understand the first-year rate on newer cars.For cars registered from April 2017 onwards, the tax paid in the first year is a separate, emissions-based figure. It rises steeply with CO2 and it is usually rolled into the on-the-road price by a dealer, which is why buyers of new cars rarely see it and are surprised by how different the second year is. Diesel cars that do not meet the RDE2 standard for nitrogen oxide are charged a higher first-year rate.
3. Understand the standard rate from the second year.After the first year the vehicle moves to a standard rate that does not depend on its emissions. That is why a low-emission and a high-emission car of the same age can pay the same in year two while having paid very different amounts in year one. Alternative-fuel vehicles have historically had a small difference; check the current tables.
4. Check whether the additional rate applies.Vehicles with a list price above a set threshold when new pay an additional amount on top of the standard rate. It runs for a fixed number of years — currently five — counted from the second time the vehicle is taxed, then falls away. It is based on the list price when new including options, not on what anyone paid or on what the car is worth now, which is why a used car bought cheaply can still be carrying it.
5. Know that electric vehicles are now inside the system.Zero-emission cars were exempt for years and are no longer. They now pay a first-year rate, then the standard rate, and the additional rate applies to zero-emission cars above the relevant list-price threshold depending on when they were registered. The GOV.UK rate tables set out which registration dates fall where, and this is one of the areas most likely to have moved since anything you last read.
6. Understand the older CO2 band system.Cars registered between March 2001 and March 2017 sit in lettered CO2 bands with a single annual rate and no first-year distinction. This is why a fifteen-year-old small diesel can be very cheap to tax while a similar-sized modern petrol is not — they are being taxed under different systems entirely, not by different logic.
7. Know what happens when a car is sold.Vehicle tax is not transferable. When you notify DVLA of a sale, your tax is cancelled and you are refunded for full remaining months automatically. The buyer must tax the vehicle before driving it, which they can do immediately using the new keeper slip from the V5C. There is no grace period.
8. Choose how to pay, and understand the cost of each.Annually in one payment, six-monthly, or monthly by direct debit. The six-monthly and monthly options cost more in total than paying for twelve months at once — the surcharge is stated on the GOV.UK tax rate pages. A direct debit renews automatically as long as the vehicle has a valid MOT and insurance.
9. Watch for the direct debit failing silently.A direct debit is cancelled if the MOT lapses, if the vehicle is sold, or if a payment is missed. DVLA writes to the keeper, and that letter is easily missed. An untaxed vehicle is subject to penalties and can be clamped, so it is worth checking the vehicle's status after any MOT gap or bank change.
10. Check exemptions rather than assuming.Some vehicles are exempt but must still be taxed at a nil rate rather than left untaxed — historic vehicles over a defined age, and vehicles registered in a disabled or disabled passenger vehicle tax class. Exempt is not the same as ignoring it; the vehicle still has to be in a tax class.

Tips

• Before buying any used car, look up its actual tax cost on the GOV.UK vehicle enquiry service rather than estimating from the engine size. It takes a minute and it occasionally changes which car you buy.
• The additional rate on higher-list-price cars is one of the least visible costs of buying a nearly-new premium car second hand. Ask the seller how many years of it are left, and check the registration date yourself.
• Paying monthly or six-monthly costs more over a year than paying annually. If cash flow allows it, the annual payment is the cheaper option and the difference is published.

Common mistakes

• Assuming tax transfers with the car — It has not since 2014. The seller is refunded and the buyer must tax it before driving away. Driving an untaxed car home from a purchase is an offence.
• Budgeting for the first-year figure as if it were annual — For cars registered from April 2017 the first year is a separate emissions-based rate. The second year is the standard rate and can be very different in either direction.
• Believing an electric car is still tax-free — Zero-emission cars now pay vehicle tax, and higher-value ones can attract the additional rate. Check the current GOV.UK tables against the vehicle's registration date.

If it doesn't work

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