Chancellor Alistair Darling has confirmed a reform of the Vehicle Excise Duty (VED) structure.
From 2009, VED will be restructured so that there are financial incentives for choosing the greenest cars.
Meanwhile from 2010, there will be a new higher first year rate to deter people buying hgh emitting vehicles.
This means low polluting cars - those emitting less than 130g/km of CO2 - will pay no VED in the first year.
But cars that produce more than 254g/km will pay a first year VED rate of £950.
His decision was based on Professor Julia King’s review of low carbon cars.
Her review was published today.
Professor King found that by simply switching to the cleanest cars on offer, motorists could save 25 per cent of their fuel costs.
Therefore, the Chancellor has amended the road tax system to support the use of more carbon-efficient, and therefore less costly, cars.
"Firstly, from April 2009, I am proposing a major reform to Vehicle Excise Duty to encourage manufacturers to produce cleaner cars and by introducing new bands, there will be an incentive to encourage drivers to choose the least polluting car," he said.
"And, as a second stage for new cars, from April 2010 there will be a new first-year rate based on carbon dioxide emissions of the car. "
Cars that emit less than the proposed 130g per kilometre of carbon dioxide emissions will pay no car tax at all in the first year.
But a higher first year rate will be introduced on the most polluting cars.
"It is right that if people choose to buy a more polluting car that they should pay more in the first year to reflect the environmental cost," said Mr Darling.
The changes are:
- six new VED bands from 2009-10 - including a new top band (band M) for most polluting cars that emit more than 255g CO2/km;
- reducing the standard rate, in 2009-10, for all new and existing cars that emit 150g of CO2/km or less;
- and increasing the rate on the most polluting cars to £425;
- from 2010-11, extending the zero rate of VED, during first year of ownership, to all new cars that emit 130g CO2/km or less;
- holding the first year rate for all new cars that emit between 131 to 160g CO2/km equal to the standard rate in 2010-11;
- for the most polluting cars a first year rate of £950 in 2010-11;
As a result of these changes, the majority of motorists are better or no worse off in 2009 said the Chancellor.