From July 2026, new VAT and insurance tax rules will affect the Motability Scheme which helps disabled people lease vehicles using their PIP or other disability benefit payments
Chancellor Rachel Reeves has announced changes to tax exemptions for the Motability Scheme, set to kick in from 1 July 2026, as part of the Autumn Budget. The Motability Scheme is a vital resource for many disabled individuals and families, offering them the ability to lease a car, wheelchair accessible vehicle, scooter or powered wheelchair.
Those eligible can exchange all or part of their enhanced mobility award from a qualifying disability benefit such as Personal Independence Payment (PIP). It’s important to stress that no one on the Motability Scheme gets a ‘free car’, and most of the 815,000 people currently leasing often have to fork out an additional upfront payment.
The scheme will continue to provide the best possible leasing package for disabled people, with a range of suitable vehicles to meet their needs. Existing leases won’t be affected by any changes.
The Motability Foundation, the independent charity responsible for overseeing the Scheme, will carry on offering means-tested grants to help eligible individuals who might otherwise struggle to afford specialist adaptations for a vehicle leased through the Scheme, reports the Daily Record.
HM Revenue and Customs (HMRC) has provided online guidance detailing the proposed changes to tax relief, who will be impacted, and the potential effects of the reforms. A summary of the changes is given below, with full details available on GOV.UK..
What is changing?
The proposed alterations relate to qualifying schemes, with the Motability scheme presently standing as the only example, offering vehicle leases with beneficial tax arrangements to disabled people who receive appropriate welfare payments.
Why the changes are being made
The guidance states: “The policy objective for the measure is to promote fairness and value for money for taxpayers. VAT changes restrict tax reliefs for more expensive vehicles provided under qualifying schemes, while IPT changes bring the tax treatment of qualifying schemes in line with other commercial lease providers.”
Who will be affected
From 1st July 2026, qualifying schemes leasing vehicles to eligible disabled people will be impacted – currently only the Motability scheme – alongside businesses providing insurance to such schemes.
VAT
Eligible payments issued to claimants may be used towards lease costs. This portion of the payment will be excluded when calculating the supply value for VAT purposes, ensuring no VAT is charged on it.
However, the measure will scrap the VAT zero-rating on additional top-up payments, made beyond the transfer of eligible welfare benefits, for those paying extra to lease higher-value vehicles. Such top-up payments will become subject to the standard VAT rate (20%).
These changes will not impact the current zero rate applied to vehicles specifically designed or substantially and permanently adapted for wheelchair or stretcher users. As a result, top-up payments for such vehicles will remain zero-rated.
Insurance Premium Tax
The guidance states: “This measure restricts the Insurance Premium Tax (IPT) exemption for insurance on vehicles leased through qualifying motor vehicle leasing schemes.
“Once changes take effect, the exemption will apply only to insurance contracts relating to vehicles that are substantially and permanently adapted for wheelchair or stretcher users, or originally designed for their use, where leased through a qualifying scheme.
“All other vehicles provided through such schemes will be subject to IPT at the standard rate of 12 per cent. The liability of insurance relating to all vehicles provided through leases entered into prior to 1 July 2026 will remain exempt.”
How to apply
To apply to lease a vehicle using the scheme, go to the Motability website where you can:
- Choose a vehicle
- Find a dealership
When visiting a dealership, you need to present your certificate of entitlement.
