The Chancellor has announced a new vehicle excise duty (VED) banding system for cars registered on or after 1 April 2017, as part of the 2015 budget.
The road tax system will be revised with a flat rate of £140 for most cars, except in the first year when tax will remain linked to the CO2 emissions that cars produce. Electric cars won't pay any road tax at all and the most expensive cars will pay more.
Existing cars won't be affected - no one will pay more for a car that they already own. The money brought in from road tax in England will be spent on England's roads from 2020. Osborne said: " I will return this tax to the use for which it was originally intended. I am creating a new Roads Fund. From the end of this decade, every single penny raised in Vehicle Excise Duty in England will go into that Fund to pay for the sustained investment our roads so badly need" adding: "Tax paid on people's cars will be used to improve the roads they drive on."
Cars, including zero-emission cars, with a list price above £40,000 will be subject to a £310-per-year supplement for the first five years in which the standard rate is paid.
Mike Hawes, The Society of Motor Manufacturers & Traders (SMMT) Chief Executive, said, "We recognise the current VED system needs to be reformed and highlighted this in a recent report. The Chancellor's Budget announcement on the regime came as a surprise and is of considerable concern. While we are pleased that zero-emission cars will, on the whole, remain exempt from VED, the new regime will disincentivise take up of low emission vehicles. New technologies such as plug-in hybrid, the fastest growing ultra low emission vehicle segment, will not benefit from long-term VED incentive, threatening the ability of the UK and the UK automotive sector to meet ever stricter CO2 targets.
"The introduction of a surcharge on premium cars also risks undermining growth in UK manufacturing and exports. British-built premium cars are in increasing demand at home and globally, and the industry helps to support almost 800,000 jobs in the UK. Levelling a punitive tax on these vehicles will almost certainly impact domestic demand."
Osborne also confirmed a further freeze on fuel duty saying "I can also confirm that there will be no changes to the plans for fuel duty I set out in March - fuel duty will remain frozen this year."
The British Vehicle Rental and Leasing Association (BVRLA) has given a cautious welcome to the Summer Budget and the freeze on fuel duty and changes to the MOT test.
Commenting on the announcement, BVRLA Chief Executive Gerry Keaney said: "Motorists and businesses will benefit from this continued freeze, but there is now a compelling case for the government to go one-step further and provide a real stimulus to the UK economy by cutting fuel duty."
Commenting on the new VED bands from 2017, Keaney added: "Although we welcome the commitment to maintain current VED revenues and invest the income on roads in the future, we are concerned that the existence of two different VED bandings from 2017 could create extra complexity and cost for the fleet market," said Keaney.
"The new 2017 bandings also represent a policy shift away from the tax being based solely on tailpipe emissions, with vehicles costing more than £40,000 facing an extra annual £310 surcharge for the first five years. Many ultra-low emission hybrid vehicles could fall into this category, which might put prospective customers off."
Elsewhere, the BVRLA says it looks forward to the government's planned consultation on pushing the first car MOT back to four years, but believes that a wider discussion on vehicle testing is needed.
"Cars are more reliable than ever, but extending the first MOT deadline could pose safety issues for cars that are doing high mileages and aren't serviced regularly. There could be a case for developing a time and mileage-based criteria for the first MOT," said Keaney.
"Vans are the fastest growing sector of the road transport sector and concerns over their first-MOT pass rate mean that the government did the right thing in excluding them from this proposal."
The Freight Transport Association says common sense has prevailed with the announcement of a freeze on fuel duty, but that it will continue to campaign for cuts on behalf of its members. James Hookham, FTA's Deputy Chief Executive, said: "The Chancellor has listened to the voice of industry by keeping fuel duty at current levels, which is to be welcomed. However, the Government has emphasised that its primary objective is to protect the UK economy. We believe that reducing fuel duty would make a huge contribution to this objective and we will continue to campaign with FairFuelUK for a 3 pence per litre cut in order to stimulate economic growth."