Government Incentives for Low-Carbon Vehicles

LowCVP Passenger Car Working Group meeting, Wednesday 21 May

Government incentives for low-carbon vehicles

Note by Department for Transport

1. This paper gives a summary of the current UK Government incentives for low carbon passenger cars, including taxation incentives and Powershift grants.

Vehicle Excise Duty

1. In 2001 the Government reformed the vehicle excise duty (VED) system – the annual road tax. Drivers of fuel efficient low-carbon cars now pay less road tax than drivers of other cars. The new system is on a sliding scale and applies to cars first registered from March 2001. It is based on the car’s tailpipe CO2 emission level and fuel type, and has six bands (see table below). For example, the road tax for an alternatively fuelled car in the lowest emission band is £55 a year. A car in the highest emission band pays £165.
2. Budget 2003 announced the introduction of a new AAA VED band for vehicles emitting 100g of CO2 or less per km. This new VED band aligns with the Powering Future Vehicles 2012 target for low-carbon cars.
3. For cars registered before March 2001 there are two emission bands. Cars with an engine capacity under 1550cc pay £110. This is £55 less than larger cars.
4. Although, diesel cars almost always have higher fuel efficiency than similarly sized petrol cars they tend to release more pollutants that affect local air quality. The road tax system recognises this, therefore diesel cars pay slightly more road tax than petrol cars with the same CO2 emission level.

Company Car Taxation

1. Major reforms of the way that company car drivers are taxed were introduced from April 2002. The personal income tax charge and National Insurance Contributions (NICS) on the benefit of a company car has been based on a percentage of the car’s list price graduated according to the level of the car’s CO2 emissions.
2. Diesel cars (other than those meeting Euro IV emission standards) pay a 3% supplement compared to petrol cars to take account of higher emissions of pollutants which have an adverse effect on local air quality. Cars using alternative fuels receive a small discount.
3. This major reform of company car tax is broadly revenue neutral and is intended to promote the use of cleaner vehicles and fuels.
4. The rates of company car taxation from 2003/4 to 2005/6 have already been determined (see graph at Annex B). In 2003/4, cars with emissions below 155g/km are taxed at 15% of the list price. For every 5g/km increase, up to a maximum of 255g/km and 35%, a further 1% of the car’s list price is taxed. Cars with emissions over 265g/km are taxed at 35% of the list price. In 2004/5 the qualifying levels of CO2 emissions for the lowest (15%) and highest (35%) rates of tax are reduced to 145g/km and 245g/km respectively. Budget 2003 announced that in 2005/6, the qualifying levels would further reduced to 140g/km and 240g/km respectively.
5. Inland Revenue is in the process of evaluating the company car taxation reforms against the original policy objectives. The results from this evaluation will be available towards the end of 2003.

Powershift Grants

1. The DfT sponsored Powershift programme, administered by the Energy Saving Trust, provides grants towards the cost of new alternative fuelled vehicles and towards the cost of converting existing vehicles to use alternative fuels. The programme, through Government grants and assistance, aims to create the conditions for clean fuel vehicles to be practically and economically viable.
2. Grants are available to help with the purchase of approved vehicles running on liquefied petroleum gas (LPG), natural gas and electricity (including hybrids). All applicants seeking grant funding for clean fuel vehicles (CFV's) must choose vehicles that appear on the PowerShift Register. The grant is calculated as a percentage of the additional (ex-VAT) cost of buying or converting a vehicle to run on clean fuels.
3. Depending on its emissions performance, each vehicle on the PowerShift Register is assigned to an Emissions Band - this helps to determine the percentage funding allowable. There are three Bands: 2, 3, and 4, with Band 4 being the cleanest.
4. Detailed information on the funding available is given in Annex A

DfT, May 2003

Annex A- Powershift grant levels

Electric Vehicles are considered to be in Band 4 as they have zero tailpipe emission and as such they are funded at 75%.

Petrol/electric hybrid vehicles are also assigned to Band 4. However, they receive a fixed grant of £1000 per vehicle. These grants are administered through the dealers.

In addition to this, the following vehicle categories are eligible for an additional grant percentage (provided that the base percentage from the table above is greater than zero) as follows:-

1. New cars and vans from vehicle manufacturers (VMs) will get an extra 20%

2. VM-approved conversions of new petrol cars and vans will get an extra 20% (note that a VM-approved conversion is defined as one which is warranted by the vehicle manufacturer)
3. New cars and vans from vehicle manufacturers which have been type-approved on the clean fuel will get an extra 10%.

So, for example, a new bi-fuel Vauxhall Astra which achieves Euro-IV emissions on petrol, and which achieves 40% better than Euro-IV (for NOx and HC) on gas would qualify for a 30% base grant plus a 20% VM bonus plus a 10% type approval bonus giving a total grant of 60%.