Mr Osborne that under the current VED system, by 2017, three-quarters of new cars won’t pay VED due to new fuel efficiency technologies, and said: “This isn’t sustainable and it isn’t fair.”

Instead from 2017, a new VED system will be introduced and will be used for a roads fund by the end of the decade.

For new cars, the duty in the first year will be set according to emissions, with zero emissions models not paying anything whilst the highest emitting models will pay £2,000. The system is similar to the current set-up but has been updated to take into account new technologies.

However, the system after the first year will see radical changes, with three duty bands – zero emission, standard and premium. Zero emission cars will continue to fall into the zero road tax band but anything emitting over 0g/km will qualify for a charge of £140 a year. In addition, premium models that cost more than £40,000 to buy new will require a £310 supplement on top of the £140 standard rate for the first five years.

Mr Osborne said the new Vehicle Excise Duty mechanism that would be used to fund new roads, adding that increased roads spending was announced in the last Budget but that we “need a long-term solution if we are going to fix Britain’s poor roads”.

However, the move has been criticised by the Society of Motor Manufacturers and Traders. Mike Hawes, 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.”

John Pryor, chairman of the UK’s Association of Car Fleet Operators, added: “Successive government has remained focused on driving down vehicle emissions and improving air quality. Therefore, a standard rate of VED during a vehicle’s lifetime except in the first year of ownership appears not to be in tune with such a philosophy.

“ACFO believes that it is equally important to encourage second owners to drive low emission cars and therefore would favour a graduated standard rate of VED.”