Navigating Car Finance Debt Amid Rising Interest Rates in UK

As the Bank of England raises interest rates to 5% in response to soaring inflation, many individuals reliant on car finance may find themselves facing financial challenges, especially with increased mortgage or rent payments. In this comprehensive blog, we delve into the reasons behind the interest rate hike, its impact on car finance loans, and the essential support that lenders should provide to those experiencing difficulties in debt repayment.

Below are the answers to the most asked questions about Car Tax Calculation in The UK:

How much is car tax in the UK?

The amount of car tax in the UK, also known as Vehicle Excise Duty (VED), varies based on several factors. As of my last update in September 2021, VED is calculated based on your vehicle's carbon dioxide (CO2) emissions and the type of fuel it uses. There are different VED bands, and the rates may change from year to year. Electric vehicles (EVs) and some low-emission cars may be eligible for reduced or even zero car tax. It's essential to check the latest rates and bands on the official government website or consult with the Driver and Vehicle Licensing Agency (DVLA).

Do you pay tax on cars in the UK?

Yes, you are required to pay car tax (Vehicle Excise Duty) if you own or use a vehicle on public roads in the UK. The amount of tax you pay depends on your vehicle's CO2 emissions and fuel type, as mentioned earlier. Failure to pay the appropriate car tax can result in fines or penalties, so it's essential to ensure you're up to date with your tax payments.

Do UK drivers pay road tax?

The term "road tax" is a common misconception. In the UK, there is no specific tax called "road tax." Instead, the tax that drivers pay for using their vehicles on public roads is called Vehicle Excise Duty (VED) or car tax. As mentioned earlier, the amount of VED is based on the vehicle's CO2 emissions and fuel type.

How is UK road tax calculated?

UK road tax, or Vehicle Excise Duty (VED), is calculated based on your vehicle's CO2 emissions and fuel type. The government assigns vehicles to specific VED bands depending on their emission levels. Generally, vehicles with lower CO2 emissions are in lower bands and pay less tax, while those with higher emissions fall into higher bands and pay more tax.

Electric vehicles (EVs) and some low-emission cars may be eligible for reduced or zero road tax. Additionally, vehicles registered before a certain date may be subject to alternative tax calculations.

To determine the exact amount of road tax you need to pay for your vehicle, you can refer to the DVLA website or check with your local vehicle tax office. Make sure to stay updated on any changes in VED rates and bands to avoid any potential issues with non-compliance.

How often do you pay road tax in the UK?

Vehicle Excise Duty (VED) or road tax in the UK is typically paid annually. You need to renew your road tax every 12 months to ensure that your vehicle remains legally allowed on public roads. Some individuals may choose to pay the tax on a six-month basis, but this is less common.

Is vehicle tax the same as road tax in the UK?

Yes, in the UK, vehicle tax and road tax both refer to the same thing, which is the tax paid for using a vehicle on public roads. The official term used by the government is Vehicle Excise Duty (VED), but it is commonly referred to as road tax.

Why do I pay road tax in the UK?

The road tax, or Vehicle Excise Duty (VED), is collected by the UK government to help fund the maintenance and improvement of the country's road infrastructure. By paying road tax, vehicle owners contribute to the upkeep of roads, ensuring safe and well-maintained transportation networks.

How much is car tax from April 2023 in the UK?

The rates and bands for Vehicle Excise Duty (VED) are subject to change annually, and the UK government usually announces new rates in the budget or through official updates. For the most current and accurate information on car tax rates from April 2023, it is best to refer to the official government website or contact the DVLA.

How much is car tax in the UK for 2023-24?

The rates for Vehicle Excise Duty (VED) are subject to change each year, and the UK government usually announces the new rates before the start of the tax year. For the most up-to-date car tax rates for 2023-24, it is advisable to check the official government website or contact the DVLA.

Note: Cars above £40,000 pay a £390 annual supplement for five years from the second year of registration, but electric cars are exempt from this additional charge.

Note: The rates mentioned above are subject to inflationary increases.

Please be aware that changes to the VED framework do not affect cars already registered and liable for annual road tax under a previous tax regime. Once a car is on the road, the road tax system remains unchanged, except for inflationary increases.

What is the luxury car tax in the UK?

In the UK, there is no specific tax called the "luxury car tax." Vehicle Excise Duty (VED) is applied to all vehicles based on their CO2 emissions and fuel type, regardless of whether they are considered luxury cars or not. The rates are determined by the vehicle's emissions, with lower-emission vehicles typically paying less tax.

When did the UK vehicle tax go up?

Vehicle Excise Duty (VED) rates can change from year to year, and the UK government typically announces any changes during budget announcements or official updates. The exact date of when the vehicle tax went up would depend on the specific year and the government's decision regarding tax rates. To find the specific date and details of any recent increases, it is best to refer to official government sources or contact the DVLA.

Understanding the Impact of Rising Interest Rates

Inflation remains a concern, having surged to 8.7% in both April and May, defying expectations of a decrease in the latter month. The Bank of England's interest rate, which started at a mere 0.1% in December 2021, has seen consecutive monthly increases, reaching 5% by June 2023. The primary goal of raising interest rates is to encourage reduced spending and an increase in savings. As these rates continue to climb, demand tends to cool down, leading to lower prices and decreased inflation.

How do Interest Rate Hikes Affect Borrowers?

Higher interest rates translate to increased borrowing costs, making mortgages and loans less affordable. Those with variable rate or tracker mortgages will experience an instant surge in their monthly payments. Additionally, tenants may face higher rents as landlords, dealing with increased mortgage costs, pass these expenses onto them.

The Impact on Car Finance Loans:

While car finance loans and personal loans generally feature fixed rates nowadays, future car purchases might become less affordable due to the increased bank rate. Moreover, if mortgage or rent payments rise, individuals could find it challenging to manage their car finance loans. For many, owning a vehicle is crucial for commuting to work and maintaining their livelihoods.

Support from Lenders Amid Financial Hardship:

Considering the potential struggles borrowers might face, the Financial Conduct Authority (FCA) has mandated lenders to provide tailored support during times of financial difficulty, a policy reinforced during the Covid pandemic. Lenders now work closely with borrowers to offer various support options:

1. Payment Concessions: Lenders may reduce borrowers' monthly payments temporarily to enable them to continue repaying their loans.

2. Interest-Only Payments: For those with capital repayment mortgages, switching to interest-only payments might provide relief, though it will alter the mortgage contract.

3. Term Extensions: Lenders can agree to extend the term of a mortgage or loan, lowering the monthly payments accordingly.

4. Payment Holidays: Under certain circumstances, borrowers can request payment holidays where they won't make payments for an agreed period. However, they will need to make up for the missed payments later. While lenders were required to offer payment holidays during the pandemic, it is now optional for them to provide this support.

Steps to Take If Struggling with Car Finance Payments:

If you anticipate difficulties in making car finance payments, consider these steps:

1. Assess Affordability: Calculate how much you can afford to pay monthly, considering the increased repayment or living costs.

2. Reduce Expenditure: Identify goods and services that you can temporarily stop purchasing or using to lower your monthly outgoings.

3. Engage with Lenders: Reach out to your lender(s) proactively. They have a vested interest in helping you and can assist in determining a suitable form of support based on your specific circumstances and establishing a plan for debt repayment.

4. Seek Professional Debt Advice: If you have multiple loans and are struggling to repay them, consider consulting a dedicated debt advice organization for guidance.

Conclusion:

As interest rates continue to rise, individuals relying on car finance must be vigilant about their financial obligations. Understanding the impact of these changes and seeking support from lenders during challenging times can be vital in maintaining financial stability. By being proactive and exploring available support options, borrowers can navigate car finance debt with confidence, ensuring their continued ability to travel to work and sustain their livelihoods.