Soaring inflation forces two million motorists to pay £390 tax on ‘luxury’ cars
More than two million British drivers have been forced to pay a controversial luxury car tax because of rising inflation costs, The Mail on Sunday reveals.
Chancellor Jeremy Hunt was under pressure last night to exempt middle-class families from the £390 surcharge – known as the luxury car tax – which applies to new vehicles valued at more than £40,000.
When the tax was introduced in 2017, it only affected 200,000 luxury model owners, but rising car costs have caused this number to increase tenfold in six years.
Inflation means those paying the tax also own popular mid-range family cars, such as the Ford Galaxy passenger car, on sale from £40,700.
The AA last night called the surcharge a ‘tax on the family’ and urged ministers to raise the £40,000 threshold much higher.
When the tax was introduced in 2017, it only affected 200,000 owners
Chancellor Jeremy Hunt was under pressure last night to take middle-class families out of the £390 surcharge
Official DVLA figures obtained by this newspaper show that Stockport has the highest number of people near Manchester now paying luxury car tax, followed by Milton Keynes, Slough, Peterborough and Leeds.
But the country’s wealthiest ZIP codes were not among the top ten areas paying the levy.
It has become a levy on families seeking security
Critics said middle-class families have been hit hardest by the surcharge, officially dubbed the Vehicle Excise Duty (VED) Expensive Car Supplement. The tax is based on the valuation of the car, so it also affects those who bought cars based on financial deals.
AA spokesman Luke Bosdet said: ‘The Expensive Car Supplement was a tax grab that assumed those paying for luxury models could afford the extra cost. But it has become a strain on families looking for the safety, comfort and practicality of a larger family car, such as securing multiple child seats.
“It can only be avoided by limiting vehicle choice, cramming the kids into a smaller car, or forcing a family to buy an older vehicle without the safety improvements of a newer one.” The Treasury is expected to collect more than £850 million from the luxury car tax by the end of this year.
But critics argue it taxes the wrong people.
While Stockport officially has the most “luxury” cars in the country, it was ranked the 115th wealthiest area by the latest report from the Office for National Statistic, according to DVLA data. Guildford in Surrey was the only town in the top ten luxury car tax areas to also feature in the top ten wealthiest places in the ONS. No one was in London, despite the capital being home to the six wealthiest areas.
Tom Clougherty, director of research at the Center for Policy Studies (CPS) think tank, said: “This is a classic example of fiscal impediment – of people facing higher taxes not because they are better off, but because the tax system doesn’t. is. keep track of prices. This tax on ‘luxury cars’ is no less cynical – and just as difficult to justify.”
A CPS study found that while £33bn was spent on fuel duty and car duty in 2021/22, only £5.4bn was spent on national roads and £6.4bn on local routes over that period.
Classic cars are exempt from paying road tax, as are electric vehicles. However, Hunt announced last year that electric car owners will have to pay road tax from 2025.
The average electric car in the UK costs £50,000, according to financial website NimbleFins, meaning those owners are also affected by the luxury taxation.
Treasury should at least raise the thresholds
John O’Connell, CEO of the Taxpayers’ Alliance, said: ‘VED is an arbitrary tax that unnecessarily penalizes car owners.
‘Due to inflation, households are increasingly forced to pay the higher tax, regardless of when, if and why they use their vehicle. If the Treasury doesn’t get rid of the tax, they should at least raise the thresholds and make sure rates stay frozen.”
The £390 surcharge applies to new cars listed for sale for £40,000 or more. It is due from the second year after the registration of the car to the sixth year.
Even thrifty families who haggle in the car showroom on the price of a new engine below £40,000 will still have to pay the levy as it is based on the list price.
A Treasury spokesman said: ‘Around 80 per cent of all new cars have a list price of less than £40,000, so the Government sees this threshold as an appropriate way to differentiate the premium segment of the market.
“It means those who can afford the most expensive new cars pay more than most drivers.”