Luxury Car Tax UK Explained

In the UK, the term “luxury car tax” commonly refers to the Expensive Car Supplement, which is an additional charge added to the standard rate of Vehicle Excise Duty (VED) for vehicles with a list price over £40,000. This supplement is currently set at £425 per year, and it applies during years 2 to 6 of the vehicle’s life after registration.

What Is Luxury Car Tax in the UK?

When it comes to leasing or purchasing a high-end vehicle in the UK, many drivers are surprised to discover that owning a luxury car comes with extra costs beyond the showroom price. One of the most misunderstood charges is the so-called Luxury Car Tax — a term often used to describe the premium Vehicle Excise Duty (VED) applied to expensive vehicles. Although the UK doesn’t officially call it a "luxury car tax", there are clear tax implications for vehicles with a list price over £40,000. Here's how it works.

How Does the Luxury Car Tax Work?

In the UK, Vehicle Excise Duty (also known as road tax or car tax) is charged annually. For all new vehicles registered from April 2017 onwards, the amount you pay is based on two main factors:

The vehicle’s CO2 emissions in the first year
The list price (also called the manufacturer's recommended retail price) from year two onwards

This is where the luxury car element comes in. If a vehicle has a list price over £40,000, it is subject to a £410 annual supplement for five years from the second year of registration. This is on top of the standard rate of VED, which is currently £190 for petrol and diesel vehicles and £170 for hybrid vehicles.

Who Has to Pay the Luxury Car Tax?

The £40,000 threshold applies to the vehicle’s list price, including any factory-fitted extras. It does not matter whether you bought the car outright, leased it, or financed it — the tax is still applicable if the list price crosses the threshold.

This charge applies even if you negotiated a discount at the dealership. It’s based on the official list price, not the price you paid.

Examples:

A BMW 5 Series with a list price of £48,000 will pay £190 (standard VED) plus £410 for the luxury supplement, totalling £600 per year for years 2 to 6.
A Tesla Model Y Long Range with a list price of £52,000 will also be liable for the same supplement, even though it's an electric vehicle.

What About Electric Vehicles?

From 1 April 2025, electric vehicles will no longer be exempt from Vehicle Excise Duty. This means EVs with a list price over £40,000 will also pay the luxury car supplement for five years.

Until that date, battery-electric vehicles are exempt from both the standard VED and the £40,000 surcharge. This makes leasing an EV an attractive short-term option before the changes come into effect.

How Long Do You Pay the Luxury Car Tax?

You pay the £410 surcharge for five years, starting from the second year after the vehicle is first registered. After those five years, you’ll only pay the standard rate of VED (currently £190 for petrol/diesel).

If your car was first registered over six years ago, and it’s still worth more than £40,000, the surcharge no longer applies.

Can You Avoid the Luxury Car Tax?

In most cases, if the car’s list price is over £40,000, the surcharge is unavoidable. However, there are a few ways to minimise or avoid the impact:

Choose a model below the threshold – Consider a lower trim level or remove expensive optional extras.
Lease a car that’s already registered – If the vehicle is over one year old and previously registered, the initial VED and luxury surcharge may already be covered.
Opt for a used vehicle – If the car is over six years old, you won’t pay the luxury car supplement at all.
Consider the total cost of ownership – Sometimes it’s worth paying a little more in tax if the vehicle holds its value or offers lower running costs elsewhere.

Does Luxury Car Tax Apply to Lease Vehicles?

Yes. If you’re leasing a car with a list price above £40,000, the luxury car surcharge is still factored into the monthly lease cost. Funders take VED into account when setting your monthly payments, so you’ll see a higher rate on premium models compared to cars below the threshold.

However, one benefit of leasing is that you don’t need to pay the road tax upfront — it’s included as part of your lease package for the duration of the contract. This makes budgeting much simpler.

Summary: Key Points to Remember

The UK’s version of a luxury car tax is a £410 annual supplement for five years on vehicles with a list price over £40,000.
This applies to both purchased and leased vehicles.
From April 2025, electric vehicles will no longer be exempt.
Leasing can help spread the cost of this tax as part of a fixed monthly payment.
Always check the vehicle’s list price including options, not just the price you pay.

FAQs: Luxury Car Tax

This charge is in addition to the standard annual VED, which is currently £190 for most petrol and diesel vehicles and £170 for hybrids. That means a vehicle over £40,000 will typically pay a total of £615 per year (£190 plus £425) during the applicable years. The supplement is calculated based on the vehicle’s official list price, including any optional extras added at the point of order, not the discounted or final sale price.

The Expensive Car Supplement applies for a fixed five-year period, starting from the second year after the car’s first registration. Once the vehicle reaches six years old, the supplement is no longer payable. From the seventh year onwards, only the standard rate of VED is due.

This means the easiest way to avoid the surcharge is to lease or buy a vehicle that is more than six years old or has already passed through its five-year luxury tax period. It also highlights the appeal of used or nearly-new vehicles for those looking to access high-spec models without incurring this additional tax.

From 1 April 2025, significant changes to the UK’s car tax system are being introduced, particularly for electric vehicles. Under the new rules, battery electric vehicles (EVs) will no longer be exempt from Vehicle Excise Duty. New EVs registered from this date will pay a first-year rate of £10, followed by the standard rate of £190 in subsequent years.

Most notably, electric vehicles with a list price over £40,000 will also become subject to the Expensive Car Supplement of £425 per year from the second year of registration, just like their petrol and diesel counterparts. This marks the end of the current tax break that has made electric vehicles more financially attractive, and it will affect many popular EVs such as the Tesla Model Y and Audi Q4 e-tron.

In addition to this, vehicles registered before April 2017 that are currently in lower tax bands may also see a small increase in their VED charges, depending on emissions and fuel type. The changes are part of a broader strategy to ensure fairness and consistency across fuel types as the UK moves toward greater EV adoption.

To determine if your car is subject to the Expensive Car Supplement, you need to check three things:

List Price – If your car’s official list price (including factory options) was over £40,000, it is within scope.
Registration Date – The vehicle must have been registered on or after 1 April 2017. For electric vehicles, the rule begins from 1 April 2025.
Age of Vehicle – The supplement applies in years 2 to 6 following the vehicle’s registration.

If all three of these criteria are met, then your car will be subject to the £425 luxury car tax. After the sixth year, this additional charge is no longer due, and only the standard annual VED will apply.

If you're unsure, you can usually find your vehicle’s list price in the original sales documentation or by checking the manufacturer’s brochure for the model and trim you own. Keep in mind, even small optional extras can push a car over the £40,000 threshold, triggering the surcharge.

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