This will result in a cost to the consumer of between £20 and £500, depending on the vehicle's Carbon dioxide emissions, although that cost will be hidden slightly as the first year's VED is included in a car's "on-the-road" purchase price.
The diesel supplement on company vehicle tax is also going up by 1% - which is expected to raise £70 million next year.
Since the 2015 Volkswagen emissions cheating scandal, a number of major cities including Madrid, Paris and Athens have announced plans particularly focused on cutting diesel emissions including bans, fines and restrictions.
The first year vehicle excise duty rate for diesel cars that do not meet the latest standards is set to go up by one band from April 2018 and the existing diesel supplement in Company Car Tax will increase by one percentage point.
"The tax system can play an important role in protecting our environment", Finance Minister Philip Hammond told parliament in his annual budget statement.
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After failing to land the defensive midfielder in the summer, the Reds agreed a deal which will see him move to Anfield at the end of the season.
"While we agree that environmental concerns and clean air initiatives should be a top priority, a move to increase taxation on diesel fuel vehicles this year would have sent tremors through the industry in what has already proven to be a turbulent 12 months", he said.
But a auto industry body said it would take time to bring forward the latest technology and the measure would do nothing to decrease the number of older, more polluting vehicles on Britain's roads. Mr Hammond said the higher VED rates would encourage auto manufacturers to "bring forward the next-generation, cleaner diesels that we all want to see".
"Instead of introducing a scrappage incentive for Euro 3 and older vehicles, which would have helped take heavier polluters off the road, he is penalising buyers of ultra-clean new generation Euro 6 diesels which do not comply with RDE2".
Local authorities in England with the "most challenging" pollution problems will be able to use the fund to support households and businesses to adapt as measures to improve air quality are implemented.