What is the purpose of the changes?

Without an overhaul of the current system, around 75% of new cars would be eligible for free road tax by 2017. According to George Osborne, a steady revenue from vehicle tax is needed to fund essential road maintenance throughout the UK.

Three new bands will be introduced “to make the tax fairer, simpler and sustainable”, and to encourage people to choose the cleanest cars. They are:

• zero (cars with no emissions);
• standard (most vehicles); and
• premium (cars costing £40k or more).

First year and fixed rates

Emissions will only be taken into consideration for the first year's tax bill. After that, a standard rate applies. This aims to make road tax fairer for drivers with older cars, which can be very expensive to tax under current regulations. Despite this, the cost of road tax will still depend on which band your vehicle falls under. After the first year, payment will be as follows:

Zero

• Cars worth less than £40k are VED free
• Cars worth more than £40k will be subject to a £310 surcharge for the first five years

Standard

• £140 per year

Premium

• £140 per year
• £310 surcharge for the first five years

Who will these changes impact the most?

Drivers of small fuel-efficient and hybrid cars will feel the biggest impact. VED on some models will cost more than ten times as much as they do now.

Sports cars and SUVs (large cars with four-wheel-drive) that cost less than £40k, and have emissions of 226g/km and above, will work out cheaper. You could save £600 over the first five years and a huge £2,500 over ten years under the flat-rate system. If you're planning to buy a car like this, it's worth waiting until next April.

These changes apply to cars first registered after 1 April 2017. If you register your new car by 31 March 2017, the updated road tax rates won't apply. The reforms also only cover privately owned cars. Company vehicles are governed under different regulations, which are also set to change.