Tax Advisor Explains: How Does Vehicle Tax Work?

If you own a vehicle and intend to use it on public roads, you must pay taxes. So far, so familiar. In general, there isn’t much to keep in mind compared to other taxes—or at least that’s how it seems. When you register a vehicle, it is automatically registered with the tax authorities. So there isn’t much to worry about. Still, it makes sense to understand how vehicle tax works and what special tax rules apply. You might even save some money by learning about vehicle tax and the relevant regulations. We have therefore summarized the most important aspects in this article.

How is vehicle tax calculated?

It is well known that you have to pay taxes on a motor vehicle. Once you have registered the vehicle with the relevant authority, you will receive a notice shortly thereafter regarding the tax due in the future. But how is the vehicle tax calculated?

When calculating vehicle tax, there are certain differences depending on the year of registration. Generally speaking, newly registered vehicles incur significantly higher taxes. The amount of the tax depends primarily on the vehicle’s engine displacement and its CO2 emissions. Regarding engine displacement, a fee of 2 euros is charged for every 100 cubic centimeters or fraction thereof for gasoline-powered vehicles. For diesel vehicles, the rate is 9.50 euros per cubic centimeter. It is therefore clear that diesel vehicles incur significantly higher tax costs. Regarding CO2 emissions, approximately 2 euros per gram of carbon dioxide is charged. There are certain tax exemptions here, the amounts of which vary depending on the year of registration. Generally speaking, however, an environmentally friendly car costs significantly less in taxes than a vehicle with high CO2 emissions. Incidentally, since the Volkswagen Group’s emissions scandal, a new testing procedure for CO2 emissions has been in use, which has led to higher and more realistic values being measured, but consequently also means a higher tax burden.

Vehicle Tax for Special Vehicle Types

If you drive a “normal” passenger car, the calculations mentioned above will almost certainly determine your tax liability. However, certain vehicle types are treated differently under the vehicle tax system. We will explain the most important exceptions below.

• Classic cars – If your vehicle can be classified as a classic car and thus receives an “H” license plate, there is a flat-rate vehicle tax. For motorcycles, the tax amounts to 46.02 euros. For all other classic cars, it is 191.73 euros. Due to the high CO2 emissions of older vehicles, owners of classic cars can certainly be pleased with these flat-rate costs.
• Electric vehicles – If an electric vehicle was registered after May 18, 2011, or is registered today, there is a full vehicle tax exemption for 10 years. This regulation is valid until December 31, 2030. The electric car is thus arguably the most tax-efficient vehicle class. In addition, there are many other financial benefits if you choose an electric vehicle. From a tax perspective, this is therefore a definite incentive when purchasing a new vehicle compared to traditional passenger cars.
• LPG and natural gas vehicles – There is no reduction in vehicle tax for vehicles of this type. It should be noted, however, that savings may be possible when refueling.
• Motorcycles – There is a special provision regarding the calculation of taxes for motorcycles. These vehicles are taxed solely based on engine displacement. Another advantage is that light motorcycles with a maximum of 11 kilowatts and 125 cubic centimeters are tax-exempt. Otherwise, a tax of 1.84 euros is charged per 25 cubic centimeters of engine displacement or fraction thereof.
• RV – Under certain circumstances, vehicles may be registered in the “RV” category. These can be traditional RVs as well as converted vans. The special feature is that vehicle taxes are calculated based on vehicle weight and emissions class.
• Trailers – For trailers, only the weight is used to calculate the vehicle tax.
• Trucks – Trucks are also taxed based on weight. For vehicles weighing 3.5 tons or more, emission and noise classes are also factored into the tax calculation.

How can you save on vehicle tax?

The most important question when it comes to taxes is, of course, how to save on them. While you cannot deduct vehicle tax costs on your tax return to save money, you can still optimize your tax burden in the long term with some planning.

The most important step to save on vehicle tax is to consider the tax implications when purchasing a new vehicle. The potential for savings on vehicle tax is particularly evident with environmentally friendly vehicles. It therefore makes sense to carefully consider what kind of vehicle you actually need. In general, small and compact cars with a smaller engine displacement are more affordable. Additionally, you should ensure that CO2 emissions are as low as possible. It is likely that further measures will be adopted in the future that will impose significantly higher taxes on vehicles with a high carbon footprint. Ideally, you should consider whether an electric vehicle is a viable option. From a financial perspective, purchasing one is often very attractive.

If you already own a vehicle and plan to continue driving it, there are also ways to reduce your tax burden. Depending on the vehicle, there are various options for retrofitting it to make it more environmentally friendly. Whether the retrofit is worthwhile must be calculated on a case-by-case basis. Often, it may no longer be worth it for older vehicles because the savings over the vehicle’s useful life are not substantial enough. Nevertheless, it’s worth doing the math.

One tip that every car owner can follow is to pay annually. Similar to car insurance, you can pay taxes annually or at shorter intervals. Paying in shorter installments comes with a 3 to 6 percent surcharge. Therefore, it makes a lot of sense to opt for annual payment and save some money.

There is a special provision and opportunity for savings for people with severe disabilities. Depending on the disability, a reduction or complete exemption from vehicle tax can be applied for. There is another special rule for vehicles used exclusively for agricultural purposes. However, this naturally applies to only a small percentage of vehicles and is therefore not relevant for the average vehicle owner.

Tax Advisors in Düsseldorf and Oberhausen

Did you enjoy this post? We regularly publish new articles on a wide range of topics in the field of taxes and finance. With our offices in Düsseldorf and Oberhausen, we are also available to assist you in person. Our team of qualified tax professionals is here to assist you with all your tax questions and concerns. Contact us to schedule a consultation.