The government is planning changes to the vehicle lease scheme but there could be knock-on effects for some service users
The government has issued details on the possible impact of upcoming changes to the Motability service. The lease-vehicle scheme supports people with disabilities or illnesses who have mobility challenges.
It is available to people on specific disability benefits who make contributions towards a vehicle through the scheme. Vehicles have to be returned if that benefit entitlement ceases – and around 860,000 people currently use the service.
Changes are being to the scheme from July 2026. These include VAT on Advance Payments and Insurance Premium Tax. High-end vehicles such as BMW and Mercedes-Benz will also be removed from the scheme.
In Parliament on Wednesday, December 17, the government responded to an MP’s question about the expected impact of the changes. Lewisham North Labour MP Vicky Foxcroft asked the Chancellor “what assessment her Department has made of the projected financial impact of the new 12% premium insurance rate for Motability leases on (a) Motability users and (b) the car industry.”
In response, Treasury minister Lucy Rigby made a statement – and also referred to a document that spells out more clearly what the government thinks the impact could be. Her statement said: “At Budget 2025, the government announced tax changes to the Motability scheme, which will save over £1 billion over the next five years.
“The VAT relief for top-up payments made to lease more expensive vehicles will be removed for new leases from 1 July 2026, and Insurance Premium Tax will apply at the standard rate to new insurance contracts on the Scheme from 1 July 2026. The tax changes will not apply to vehicles designed, or substantially and permanently adapted, for wheelchair or stretcher users.
“These tax changes ensure Motability can continue to deliver for its customers, for example through the continued provision of a broad range of vehicle models available without any top-up payments. Further detail on the impacts of the tax changes can be found in the Tax Impact and Information Note.”
Government documents spell out impact of Motability changes
That note is the document outlining the possible impact of the Motability changes. It addresses the impact on people who use the service directly – and says some could even leave the scheme. And it warns some users could end up being worse off – admitting the changes “could reduce their disposable income”.
The document states: “The individuals who will be most impacted are those who currently choose to pay more upfront for a higher value lease. Some will pay more to renew the same or a similar vehicle, and some will lease a smaller or lower-specification vehicle in response to additional costs following tax changes. Of the customers who pay more, these costs could reduce their disposable income. While tax changes will reduce the purchasing power of eligible welfare benefits for the Motability Scheme, the value of the benefit will not be impacted.
“Other customers may not be able to, or wish to, trade down their vehicle if their needs are not met by the available selection of cars provided by the Motability Scheme which do not require a top-up payment. While some individuals will be eligible for financial support from the Motability Foundation to lease a vehicle which suits their needs, a minority may choose to leave the scheme altogether in response to tax related price increases. These people will no longer have access to a vehicle through the scheme, so would either need to pay or lease for a vehicle using other schemes or sellers or make use of alternative means of travel.
“Individuals who leave the scheme will retain their disability benefit as a cash payment which can be spent at their discretion, including on alternative means of transportation. These changes may impact the selection of vehicles which do not require a top-up payment and the affordability of certain vehicles within the scheme. However, we expect there will continue to be a broad range of vehicles available which do not require a top-up payment. This measure is therefore not expected to have a direct impact on family formation, stability and breakdown.”
It also notes that the “tax changes will directly impact qualifying schemes and their insurers. The extent to which they pass on the additional costs of these tax changes, and how they distribute these costs between their customers, is at their discretion and subject to commercial decision making. Tax changes have been calibrated to limit the combined impacts of VAT and IPT changes on qualifying schemes and their customers through the continuation of leases which do not require a top-up payment.”
The official document accepts that “this measure is likely to indirectly impact individuals who are eligible to lease a vehicle under a qualifying scheme. 815,000 people use the Motability scheme, which constitutes around 30% of those in receipt of eligible welfare benefits. The measure will apply to new leases from 1 July 2026, meaning it will affect applicants whose lease commences on or after that date, and existing users at the point when their lease is due for renewal on or after 1 July 2026.”
But it says the impact of the changes will not be ‘uniform’ – although officials admit some people will be affected. It states: “Impacts on users of the Motability scheme, the primary qualifying scheme for reliefs, will not be felt uniformly due to how the scheme works, and the differing needs of customers. While the application of VAT on top-up payments and IPT for leases will impact some customers, others will not be impacted because either:
“(a) they lease a vehicle which is designed or substantially and permanently adapted for wheelchair and stretcher users, which will remain zero rated for VAT and exempt from IPT
“(b) they lease a vehicle which does not require a top-up payment, because we expect there to continue to be a broad range of vehicles available which do not require one. It should however be noted that if a customer previously leased a vehicle which did not require the transfer of the full welfare benefit, there could be cost impacts upon renewal depending on the vehicle selection available on the scheme. This measure will also have no impact on customers who lease a powered wheelchair or scooter under the scheme.”
What changes are coming in 2026 for Motability?
According to the Motability Scheme’s website, “the Government has announced some tax changes that influence how we run the Motability Scheme. These include VAT on Advance Payments and Insurance Premium Tax. Both will be included on Scheme leases from July 2026.”
“These tax changes increase the overall cost of providing the Scheme. That’s why we’re reviewing how the Scheme works, so we can absorb these costs where possible.
“It was also announced that brands such as BMW and Mercedes-Benz have been removed from the Scheme, as we refocus on practical, affordable mobility. We’ll continue to share clear, up-to-date guidance as more details become available.”
What about the VAT changes?
The scheme’s website says: “As we pass on savings from tax exemptions to customers pound for pound, VAT on Advance Payments will increase costs. Our plan is to make changes so we can absorb these costs where possible.
“The VAT changes are coming in from July 2026, so there will be no immediate impact on our prices. In the meantime, we will continue to review our prices every three months to make sure we’re offering you the best value we can. The next update will be on 1 January. Prices can go up or down each quarter. Find out why we set our prices every three months.”
What is Insurance Premium Tax?
The government tax is applied to most insurance policies. From July 2026, this tax will need to be added to leases under Motability at the standard rate, bosses say. In November 2025, the standard rate was 12%.
