Motability Drivers Face 20 Percent VAT and a New Insurance Tax From 1 July

Big changes to the Motability Scheme came into force on 1 July 2026, adding tax to many new leases and capping how far drivers can travel. The reforms, first announced by Chancellor Rachel Reeves in last year’s Autumn Budget, are set to save the government around £1 billion over five years. For the disabled drivers who rely on the scheme to stay mobile, the practical result is a higher upfront cost on new agreements and a tighter mileage limit.

What Changed on 1 July

Two new taxes now apply to most new Motability leases. Vehicles leased through the scheme, or equivalent qualifying schemes, face 20 per cent VAT on top-up payments, the extra amount some customers pay above their weekly allowance to lease a more expensive car. On top of that, Insurance Premium Tax at the standard rate of 12 per cent now applies to most new leases taken out from 1 July 2026.

Mileage limits have tightened too. Drivers on a three-year lease are now capped at 30,000 miles, while a five-year wheelchair-accessible vehicle lease is limited to 50,000 miles. Go over the cap and the excess charges now carry VAT as well. The core benefit stays in place: people on the enhanced rate of mobility support continue to receive £77.05 per week and remain eligible for the scheme, which lets them swap that allowance for a leased car, scooter or powered wheelchair.

Who Is Affected and by How Much

The changes bite on new agreements, not existing ones. If you are partway through a lease, nothing changes until you come to renew. From that point, the new taxes feed into what you pay. Reporting on the reforms suggests the added VAT and Insurance Premium Tax could add roughly £400 to the upfront Advance Payment on a typical three-year lease, though the exact figure depends on the car you choose and how far above the basic allowance it sits.

There are important exemptions. Wheelchair-accessible vehicles and cars with significant adaptations stay outside the new tax rises, protecting drivers with the greatest need from the extra cost. The scheme also still offers a set of cars with no Advance Payment at all, so a driver can hand over their weekly allowance and drive away without paying anything upfront. Around 20 vehicles are available on that basis, including the best-selling Ford Puma, the electric Hyundai Inster and the Dacia Spring, currently the UK’s cheapest new car.

Fewer Premium Cars on the Scheme

The tax changes follow a separate move that drew heavy criticism late last year, when Motability began stripping premium models from the scheme. It has removed cars from brands including Alfa Romeo, Audi, BMW, Lexus and Mercedes-Benz, and taken out all coupes and convertibles, which tended to be higher-cost vehicles.

The Department for Work and Pensions said the aim is to return the scheme to its “original purpose” of giving disabled people access to practical vehicles, adding that it should not be used to “subsidise premium extras that go beyond what most people in this country can afford”. Work and Pensions Secretary Pat McFadden said the reforms are “driven by the fairness that underpins this Government, fairness for the taxpayer, fairness for disabled people, and fairness for the country”, and pointed to the £1 billion saving from removing VAT relief on some new leases.

Andrew Miller, chief executive of Motability Operations, acknowledged the changes came in response to the higher costs the Budget created. “While we have had to make difficult decisions in response, the changes we are making mean the scheme can keep disabled people connected to freedom and independence now and in the future,” he said, adding that it still offers value, including cars with no Advance Payment on top of the weekly allowance.

What to Do if You Are on the Scheme

If you are already leasing a car through Motability, sit tight. Your current agreement runs to its end on the terms you signed, and the new taxes only apply when you take out or renew a lease. Use the time before renewal to plan.

When you do come to renew or start a new lease, budget for a higher Advance Payment and factor in the Insurance Premium Tax on the cover bundled into your deal. Ask specifically about the no Advance Payment options, as these keep your upfront cost at zero and now look more attractive than pricier cars that carry the new VAT charge. Check the mileage cap against how far you actually drive in a year: 30,000 miles over three years works out at 10,000 a year, which is fine for many but tight for anyone with long or frequent journeys, and going over now costs more. If you use a wheelchair-accessible vehicle or need significant adaptations, confirm your exemption from the tax rises before you sign, as it could make a meaningful difference to the price. Finally, compare the running costs of the practical models still on the scheme, such as the Puma, Inster and Spring, which offer low or no upfront payments and sensible day-to-day bills.

How the Motability Scheme Works

Motability is one of the largest car schemes in the country, with more than 800,000 customers. It lets disabled people exchange the higher rate of the mobility part of certain benefits, such as Personal Independence Payment, Disability Living Allowance or the Adult Disability Payment in Scotland, for a leased car, scooter or powered wheelchair. In place of the weekly cash, the customer gets a vehicle on an all-in package.

That package is what makes the scheme popular. A single lease usually covers insurance, servicing, tyres, breakdown cover and repairs, so there are no surprise bills through the term. Most agreements run for three years, or five for a wheelchair-accessible vehicle, after which the customer hands the car back and can start again with a new one. For many disabled drivers and their families, it is the difference between getting to work, medical appointments and the shops or being stuck at home.

The reforms have drawn strong feelings on both sides. Supporters of the changes argue that taxpayer subsidy should not stretch to premium cars, and the government has leaned on that point in defending the £1 billion saving. Disability groups counter that the scheme is a lifeline, not a luxury, and worry that higher upfront costs and a narrower choice of cars will price out the people it was built to help. The removal of familiar brands and body styles late last year sharpened that anger.

It is also worth remembering what has not changed. The weekly allowance of £77.05 for those on the enhanced rate stays in place, eligibility rules are the same, and existing customers keep their current terms until renewal. The reforms reshape the edges of the scheme rather than its core, but for anyone about to choose a new car, the edges are exactly where the extra cost now sits.

If the numbers now look tighter, it is worth doing some homework before your renewal date. Motability publishes the full price list for every car on the scheme, including the Advance Payment and any adaptations, so you can see exactly what a switch would cost. Charities such as Citizens Advice and disability organisations can help you check that you are claiming the right rate of mobility support in the first place, as the scheme only opens up to those on the enhanced or higher rate. It is also worth reviewing your benefit award if your condition has changed, as moving onto the higher rate could restore access to the scheme or open up a wider choice of vehicle. A short conversation now can save an unwelcome shock when the lease is up.

Sources:

• GB News: Motability changes set to slap thousands of drivers with £1billion VAT and insurance cost
• Motability Scheme
• Department for Work and Pensions