Chancellor George Osborne has delivered today's emergency Budget, with a VAT rise from early 2011 the hardest hit on motorists' pockets.
The VAT rise to 20 per cent is from 4 January next year. The additional 2.5 per cent will raise the cost of new and used vehicles, servicing and fuel.
It means the list price of a £20,000 car will be £500 more. As an example, a new mid-spec Ford Focus will rise in list price by around £400 under the proposal.
Notably, VAT is added to the price of fuel after fuel tax is applied - so motorists are hit twice, paying a tax on a tax.
In addition, insurance premium tax will rise. The higher rate of insurance premium tax will rise from 17.5 to 20 per cent, while the standard rate will increase from 5 to 6 per cent. This levy will go on top of all car insurance, and has raised fears that more motorists will consider driving without insurance.
However, Osborne has delivered some good news for motorists, saying fuel duty will not rise above already planned rates for the time being.
Already established fuel duty rises were to add another 1p a litre on 1 October 2010 and then another 0.76p on 1 January 2011.
AA president Edmund King said: “We estimate that taking all the increases into account, motorists will, by January, be paying 4.63p a litre more for petrol and 4.68p a litre more for diesel than they are now."
Osbourne did make one concession to motorists, saying that there will be an examination of the impact of oil price rises on pump prices.
This could be the first step to establishing the fuel stabiliser plan that the Conservatives outlined pre-election, and which is designed to introduce variable tax rates according to oil prices, in a bid to keep fuel prices more stable.