What is the luxury car tax? Expensive Car Supplement explained

In April 2017 the UK government introduced a new supplemental tax on cars costing more than £40,000. It was dubbed the ‘luxury car tax’ by most, although officially it’s called the ‘expensive car supplement’. Neither term does a good job of explaining how the tax actually works, so read on to find out everything you need to know.

In the UK cars are taxed annually under the ‘road tax’ system that’s officially known as Vehicle Excise Duty (VED). There are different rules governing how much tax you pay depending on the age of your car - the oldest ones pay nothing, while cars from the 2000s generally pay based on their CO2 output, for example. Modern cars have a flat rate of £190, but adjustments are made based on various factors.

Cars with a hybrid fuel system get £10 off per year, while electric cars are free to tax. Another factor that’s part of the VED tax structure is the luxury car tax, or ‘Expensive Car Supplement’. 

What is the luxury car tax? 

Under the Expensive Car Supplement, cars that cost over £40,000 when new pay an additional £410 annually for five years starting from the first VED car tax payment that’s made when the car is a year old.

This means the total road tax for any car costing over £40,000 is £600, paid every year until the car is six years old. The £40,000 figure includes optional extras and is based on the manufacturer’s official list price of the car, not the price actually paid by the customer. 

The Expensive Car Supplement does not apply to new electric cars registered before April 1 2025 but after that date new EVs costing over £40,000 will be liable to pay the tax, as it stands.

Luxury car tax examples

Let’s look at a couple of luxury car tax examples to explain:

Because the tax applies based on list price including options, a car costing £39,000 with £2,000 of optional extras will attract the luxury car tax, but the same car without any options fitted will not.

A car that has a list price of £41,000 will always attract the tax even if you only pay £39,000 because of a dealer discount or promotional offer. Any zero-emissions or electric car will not have to pay the tax at all regardless of the list price.

You can check manufacturer list prices in the relevant brochures for the most accurate information, although the data is also widely available online.

Expensive Car Supplement isn’t only on expensive cars

Rapid inflation on car prices since the introduction of the Expensive Car Supplement means that this tax is now applied to many models not seen as being particularly luxurious, including higher-spec versions of mainstream models like the Vauxhall Astra, Ford Kuga and Volkswagen Golf.

Electric cars aren’t currently liable for the tax but their relatively high list prices mean that lots of them will be when it is applied to EVs after April 1 2025. With the £40,000 price barrier having remained fixed since the introduction of the luxury car tax in 2017, many consumer and automotive industry bodies feel it should be increased to reflect the rise in car prices. 

In the meantime, if you’re thinking of buying a new car at around the £40,000 mark, it could pay to work out if the list price will be above that barrier with your chosen options added. If it’s close, you could save money by removing one or two of them to avoid paying the Expensive Car Supplement. 

Click here to learn more about VED car road tax...