The Chancellor George Osborne has announced a new road improvement fund paid for directly by the Vehicle Excise Duty.

By the end of the decade, all VED will be put directly into the new fund, which will only be used to maintain highways. The change, announced in the 8th of July Budget, is the biggest change to motoring in years.

The chancellor said: "We will create a new roads fund from the end of this decade and every single penny raised in vehicle excise duty will go into that fund to pay for roads. The tax paid on people's cars will be used on the roads they drive on. It's a fairer tax system for motorists."

How much different types of car pay into the VED will also be overhauled, because under current rules by 2017 around 75 per cent of cars will be exempt from the 126 year-old tax.

With cars becoming more fuel efficient and greener, many new cars are presently paying little or no VED.

The Chancellor said it wasn’t fair that those who could afford a new car were not paying VED, while those who could only afford a used car, did.

The VED has not been ring-fenced for road improvements since the 1930s.

The Chancellor pointed out that the new rules will not raise any additional income for road maintenance, but it will "be more secure" – and fairer than at present.

The Chancellor also announced that cars won't need an MOT for four years after being purchased new. The period before an MOT must be taken currently stands at three years.

Osborne also said fuel duty would be frozen for the remainder of the year.