The Department for Work and Pensions (DWP) and HM Treasury have issued a significant update on the future of the Motability scheme, addressing parliamentary questions about forthcoming tax changes. The reforms, announced in the 2025 Budget, are designed to ensure the scheme's sustainability while continuing to support disabled people.
Key Tax Changes Announced
In response to a written question from Conservative MP Neil O'Brien, Exchequer Secretary to the Treasury, Dan Tomlinson, confirmed the details. The government estimates the tax changes will save over £1 billion for the public purse over the next five years. From 1 July 2026, two major adjustments will take effect for new leases.
Firstly, VAT relief will be removed for top-up payments made to lease more expensive vehicles. Secondly, Insurance Premium Tax (IPT) will apply at the standard rate to insurance contracts within the scheme. Sir Stephen Timms, responding for the DWP, stated this brings the scheme's tax treatment in line with commercial leasing firms.
Protections for Existing Users and Adapted Vehicles
The government has emphasised that certain groups will be shielded from the changes. Existing leases will not be affected, and vehicles designed or substantially and permanently adapted for wheelchair or stretcher users will continue to benefit from full VAT relief and the IPT exemption. This recognises the higher costs associated with these specialist vehicles.
Sir Stephen Timms assured MPs that the Motability Scheme will continue to offer a broad choice of vehicles, with many available without any advance payment. This means users can still access a suitable vehicle using only their qualifying disability benefit, such as the higher rate mobility component of PIP or Disability Living Allowance.
Addressing Concerns and Future Support
Labour MP Ruth Jones and Green Party MP Siân Berry raised concerns in the Commons about the impact on users' lived experience and transport barriers. In his replies, Sir Stephen Timms highlighted the scheme's vital role in breaking down barriers to work and participation in society.
He also pointed to the ongoing support from the Motability Foundation, the independent charity overseeing the scheme. The Foundation will continue to provide means-tested grants to help eligible people who might struggle with advance payments. Furthermore, the Foundation has published a strategy aimed at improving transport access for disabled people through direct action and partnerships.
The next official estimate for the cost of VAT relief for disabled people, which includes the Motability scheme, will be published by HMRC on 22 January 2026. This release will include figures for the 2024-25 period and a forecast for 2025-26.
