The government has confirmed significant alterations to the tax exemptions supporting the Motability Scheme, a vital programme used by over 815,000 disabled people across the UK to lease vehicles. Announced in November 2025, the reforms are designed to promote "fairness and value for money for taxpayers" and will take effect from 1 July 2026.
What is changing in the Motability Scheme?
The forthcoming adjustments will modify the tax relief currently available for vehicles leased through the scheme. At present, the Motability Scheme is unique in offering vehicles on favourable tax terms to individuals receiving specific welfare benefits. The changes, outlined in guidance from HM Revenue and Customs (HMRC), will bring the scheme's tax treatment closer in line with standard commercial leasing.
Importantly, the Motability Foundation has confirmed that existing leases will not be affected by the new rules. The charity will also continue to provide means-tested grants to help with the cost of specialist adaptations.
VAT Relief Restrictions
A key change concerns Value Added Tax (VAT). Currently, the portion of a lease payment covered by an eligible mobility benefit—such as the higher rate of Personal Independence Payment (PIP)—is zero-rated for VAT. From July 2026, this core principle remains. However, the reform will scrap the VAT zero-rating on "top-up" payments made for leasing more expensive vehicles.
This means any additional payment a customer makes beyond the value of their transferred benefit will be subject to the standard 20% VAT rate. An important exemption exists for vehicles specifically designed or substantially and permanently adapted for wheelchair or stretcher users; top-up payments for these will retain their zero-rated status.
Insurance Premium Tax Exemption Narrowed
Parallel changes will apply to Insurance Premium Tax (IPT). The current IPT exemption for insurance on all Motability-leased vehicles will be restricted. After 1 July 2026, the exemption will only apply to insurance for wheelchair or stretcher accessible vehicles.
Insurance for all other standard vehicles leased through the scheme will be subject to IPT at the standard rate of 12%. As with the VAT changes, insurance for vehicles on leases started before the implementation date will remain exempt.
Who is eligible for the Motability Scheme?
The core eligibility criteria for joining the scheme are not changing. To apply, an individual must receive one of the following qualifying mobility allowances and have at least 12 months remaining on their award:
- Higher rate mobility part of Personal Independence Payment (PIP)
- Higher rate mobility part of Disability Living Allowance (DLA)
- Enhanced rate mobility part of Adult Disability Payment (ADP) in Scotland
- War Pensioners' Mobility Supplement (WPMS)
- Armed Forces Independence Payment (AFIP)
The Motability Scheme clarifies that recipients of lower-rate allowances, or benefits like Carer's Allowance or Employment and Support Allowance (ESA), are not eligible to join.
Prospective users should note that while the scheme exchanges a mobility award for a lease, it does not provide a 'free car'. The majority of leases require an advance payment, typically between £100 and £2,000.
What does a Motability lease include?
A lease package currently provides a new vehicle and comprehensive cover for three years, including:
- Servicing, maintenance, and repairs
- Full insurance coverage
- RAC breakdown assistance
- Annual vehicle tax
- Windscreen repair and replacement tyre cover
- A 60,000-mile allowance (100,000 for Wheelchair Accessible Vehicles)
- Many adaptations at no extra cost
The Motability Foundation advises anyone concerned about the changes or seeking to understand their eligibility to consult the full guidance on the GOV.UK website or visit the official Motability Scheme site for detailed information.
