The new tax year starts on 6 April 2026. For most people, this date passes without much thought. But 2026/27 brings several changes that will land in your pay packet and on your fuel bills, plus one big announcement for anyone considering an electric car. If car finance is on your shortlist for the next few months, knowing what is changing and what it means for your monthly budget could be the difference between an approval and a decline.
This article walks through the five key changes and, more importantly, what each one means if you are thinking about applying for car credit. By the end, you will know whether your disposable income is genuinely tighter, simply looks different on paper, or has moved enough to affect what a lender will offer you.
Your take-home pay in 2026/27: is it going up or down?
Short answer for most employed people: your gross salary may have risen, but your take-home pay has probably not kept pace. That gap matters when you apply for car finance.
The personal allowance stays frozen at £12,570
The income tax personal allowance has been frozen at £12,570 since 2021, and the Autumn Budget 2025 extended that freeze until at least April 2031. On the surface, this sounds neutral. It is not.
With wages rising but the threshold fixed, more people are being pulled into higher tax bands. If your salary went up in the last year, you are paying more income tax even though the rates have not changed. Economists call this fiscal drag: a polite term for paying more tax without the government having to announce a rate rise.
Worked example. If you earned £25,000 last year and now earn £28,000, the extra £3,000 costs you £600 in income tax plus £240 in National Insurance. That is £840 gone from a £3,000 pay rise, or roughly 28%, before the money reaches your account. Your car finance application will assess disposable income based on your net pay, and the freeze shrinks what counts as disposable.
National Insurance: the employee rate and your monthly pay
The employee National Insurance rate is 8% on earnings between £12,570 and £50,270. That rate is unchanged for 2026/27.
On a salary of £28,000, National Insurance costs you about £103 a month. At £35,000, the figure rises to roughly £149 a month. When lenders assess your disposable income, they deduct both income tax and National Insurance from your salary to work out what you actually have available for a finance payment.
Pay slips from April onwards will show the updated figures. That is the number to bring to a lender.
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Using a soft check to match your actual position When you apply for car finance, lenders assess your disposable income: the money left after tax, National Insurance, and essential outgoings. Kandoo’s soft-check approach matches you to a lender based on your actual current income, without leaving a mark on your credit file. |
Vehicle Excise Duty: what you will pay to tax a car from April 2026
From April 2026, several changes to Vehicle Excise Duty (VED), the official name for road tax, take effect. If you are financing a car, these feed directly into your total cost of ownership.
Standard VED rates rise with inflation
The standard annual VED for most petrol, diesel, and hybrid cars registered after April 2017 is now £200, up from £195 in 2025/26. Paying by monthly Direct Debit brings the annual total to £210.
First-year rates (the “showroom tax”) for new registrations also rise with inflation. The cleanest new cars attract a modest first-year bill. At the opposite end, new models emitting over 255g/km of CO2 now face a first-year rate exceeding £5,500.
Neither figure is dramatic on its own, but both affect the total monthly cost when you do your affordability sums.
Electric vehicles: now in their second year of paying road tax
Electric vehicles first became subject to VED in April 2025. Zero-emission cars registered on or after 1 April 2025 pay a reduced first-year rate of £10, then move onto the £200 standard rate from year two. Older EVs registered between April 2017 and March 2025 also pay the full £200. Very old EVs registered between 2001 and 2017 now pay £20 a year.
Better news arrived for EV buyers in April 2026: the Expensive Car Supplement threshold for zero-emission cars rose from £40,000 to £50,000. For petrol and diesel cars the supplement still kicks in at £40,000 and adds £440 a year for five years, making the total tax bill £640 a year on a £40k+ petrol or diesel. EV buyers now have £10,000 of headroom before that same supplement applies.
One change is coming that is worth flagging, though not for another 18 months. A pay-per-mile charge for EVs and plug-in hybrids has been announced for April 2028. The current plan is 3p per mile for EVs and 1.5p per mile for plug-in hybrids. For someone doing 8,000 miles a year in an EV, that is roughly £240 on top of the standard VED. Worth factoring in if your finance term runs past April 2028.
Fuel and running costs: what 2026/27 actually changes
Fuel duty is currently 52.95 pence per litre, including the temporary 5p cut introduced in March 2022. At the Autumn Budget 2025, the government confirmed that cut stays in place until 31 August 2026. After that date, it unwinds in three steps:
- 1 September 2026: +1p per litre
- 1 December 2026: +2p per litre
- 1 March 2027: +2p per litre
By April 2027, fuel duty will be back to pre-2022 levels, with annual inflation-linked uprating resuming from 2027/28 onwards.
What this means for your monthly budget: the petrol or diesel line on your outgoings will rise modestly through the second half of 2026/27. Not by enough to sink a finance application, but enough that building a small buffer into your numbers is sensible if you are signing a multi-year agreement.
What does all this mean for your car finance application?
You have now seen the numbers. Your income may be up but tax and National Insurance are taking more of it, VED has risen, EV buyers have a new £50,000 supplement threshold to think about, and fuel costs will creep up through the autumn and winter. How does all that translate into approval or decline?
Lenders look at disposable income, not just your credit score
Car finance lenders assess affordability by calculating your disposable income. They take your gross salary, deduct income tax and National Insurance, then subtract essential outgoings like rent, council tax, existing debts, and utilities. What remains is available for a new car payment.
The 2026/27 changes affect that calculation, but not dramatically for most employed workers. Someone earning £28,000 has combined monthly tax and NI of roughly £360, compared with around £290 on a £25,000 salary. A £70 monthly gap is real but manageable, and most car finance monthly payments sit higher than that.
Does the frozen allowance matter if you have imperfect credit?
If you have a thin credit file or missed payments in the past, lenders already apply tighter affordability criteria. Fiscal drag pulling slightly more tax from a rising salary is unlikely to be the deciding factor on whether your application is approved. Much more important is whether you can demonstrate stable, consistent income over recent months.
A lender looking at an imperfect-credit application focuses on three things: your current income (evidenced by recent pay slips), your existing debts (from your credit file), and whether you have a pattern of meeting payments on time over the last 12 months. The 2026/27 tax changes are background noise compared with those three.
Is now a good or bad time to apply?
The new tax year is a genuinely natural financial reset point. Pay slips from April onwards reflect the new figures. For lenders and applicants alike, April is a clean starting point.
If you have been waiting for the right moment to explore your options, the start of a new tax year is as good as any. You will have recent pay slips showing your actual position, and a soft credit check means you can see what you qualify for without affecting your score.
Quick reference: the 2026/27 changes that affect car buyers
|
Change |
Figure |
What it means for you |
|
Personal allowance frozen |
£12,570 (frozen until 2031) |
Your tax bill rises if your salary rises. Take-home pay grows slower than gross pay. |
|
Employee National Insurance |
8% on earnings £12,570 to £50,270 |
Rate unchanged, but still reduces your disposable income. Factor it into your monthly budget. |
|
Standard VED (post-2017 petrol, diesel, hybrid) |
£200 (up from £195 in 2025/26) |
Modest increase. Update your annual cost calculation. |
|
Expensive Car Supplement threshold (EVs only) |
Raised to £50,000 (was £40,000) |
EV buyers have more headroom before the £440/year supplement applies. Petrol/diesel threshold stays at £40,000. |
|
Fuel duty |
Frozen at 52.95p until 31 August 2026, then rising in three steps to pre-2022 levels by March 2027 |
Fuel costs rise slightly through the second half of the tax year. Build a small buffer. |
|
Pay-per-mile EV tax (eVED) |
Announced for April 2028 at 3p/mile for EVs, 1.5p/mile for PHEVs |
Not in effect yet, but worth modelling if your finance term runs past April 2028. |
Ready to check your options?
The 2026/27 tax year brings real changes, but none of them should stop you from exploring car finance if you need a car. Your disposable income may have shifted slightly, but lenders assess exactly where you stand right now, not where you stood a year ago.
A soft credit check with Kandoo takes minutes and does not affect your credit score. You will see which lenders you match with based on your actual current income, and you can move forward with no obligation. The start of a new tax year is as good a moment as any to take that step.