What is the luxury car tax? Expensive Car Supplement explained

In April 2017, the UK government introduced the ‘Expensive Car Supplement’, also known as the ‘luxury car tax’. 

The luxury car tax is a supplementary amount added onto the annual cost of VED (Vehicle Excise Duty) road tax that you have to pay if your car cost more than £40,000 when it was brand new. 

The Expensive Car Supplement is payable for five years after the vehicle was first taxed. So it effectively has to be paid in years two to six after the car’s first registration.

How does road tax work? 

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. 

Cars which are 40 years of age or older are tax exempt, while cars from the 2000s generally pay based on their CO2 output. Cars registered after 1 April 2017 will pay a standard rate of £195, but adjustments are made based on various factors.

What is the luxury car tax? 

Under the Expensive Car Supplement, cars that cost £40,000 or more when new will pay an additional £425 annually for five years. This starts 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 £620, paid every year until the car is six years old. The £40,000 figure includes any optional extras and is based on the manufacturer’s official list price of the car, not the price actually paid by the customer. 

Are electric cars liable for Luxury Car Tax?

Electric cars now have to pay the luxury car tax. 

On 1 April 2025, changes to VED road tax were introduced so hybrid cars no longer receive the £10 annual discount and electric cars are no longer eligible for their £0 per year road tax status. This means that road tax for hybrid cars now stands at the standard rate of £195.

EVs will pay the lowest first year rate of £10, rising to £195 from the second tax payment onwards. The Expensive Car Supplement is then applied on top of this. 

Luxury car tax examples

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

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 dealer discounts, incentives or promotional offers. 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 Hyundai Tucson, Ford Kuga and Volkswagen Golf.

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. 

The future of the Expensive Car Supplement

As mentioned above, there have been no alterations made to the level at which the Expensive Car Supplement must be paid since its introduction in 2017. This is despite the fact that cars have become more expensive over that time, pushing more models over the £40,000 mark. Are we about to see a change?

In May 2025, the UK Government announced that it might consider raising the threshold of the luxury car tax “for zero emissions vehicles only” and would only be at a future fiscal event, such as at the annual Budget.

We’ll have to wait and see if the government makes any changes to the luxury car tax, or even scraps it all together, at the next fiscal event. In the meantime, the Expensive Car Supplement on cars over £40,000 is here to stay.

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