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New tax rules on Motability car leases have come into force today, 1 July 2026, as the Department for Work and Pensions implements welfare reforms announced at the Autumn Budget. The changes are projected to save taxpayers £1 billion by 2030 and sit within a broader package the government says will save nearly £2 billion by the end of the decade.
VAT now applies to advance payments, the optional one off top up paid by customers who choose a more expensive vehicle and Insurance Premium Tax (IPT) now applies to new leases. Neither change affects existing leases, and there is no change to eligibility for PIP or the Motability scheme itself.
At a glance
- VAT on advance payments: The optional top up paid for more expensive Motability vehicles now attracts VAT
- Insurance Premium Tax: IPT now applies to new Motability leases
- Projected saving: The combined changes are expected to save taxpayers £1 billion by 2030
- Benefits unchanged: Disabled people on enhanced mobility benefits continue to receive their full award of £77.05 per week
- Zero advance payment option preserved: Vehicles requiring no advance payment remain available, so eligible people can still access a car using their benefit alone
The Motability scheme was set up to help disabled people stay mobile and independent. Eligible recipients those receiving the enhanced mobility component of PIP or similar benefits can use their weekly award to lease a car, scooter, or powered wheelchair. The standard package includes insurance for up to three named drivers, UK breakdown cover, and maintenance.
The advance payment is an optional extra, customers who want a vehicle more expensive than the standard offering pay a one off top up. That top up is now subject to VAT. For customers who choose a standard vehicle, no advance payment is required and nothing has changed in practice.
Wheelchair Accessible Vehicles are explicitly excluded from both the VAT and IPT changes. Existing leases are unaffected. Eligibility for PIP and the Motability scheme remains the same. The Motability Foundation continues to provide means tested grants for people who would otherwise struggle to afford an advance payment, vehicle adaptations, or a wheelchair accessible vehicle.
Today's changes follow earlier action taken after the Autumn Budget to remove luxury vehicles including BMW and Mercedes from the Motability scheme. The government said this was intended to return the scheme to its original purpose, giving disabled people access to a practical vehicle rather than subsidising premium options beyond what most people could afford.
Work and Pensions Secretary Pat McFadden MP said "We're saving £1 billion of taxpayer money by removing VAT relief from some new Motability leases, whilst ensuring the scheme still supports disabled people's mobility and independence."
The Motability changes are one part of a larger package. The government has set out a number of other welfare reform measures running in parallel:
- Right to Try Work Guarantee: A commitment to give everyone who can work the chance to do so without immediately losing benefit eligibility
- Employment support: £3.5 billion invested in tailored support for sick or disabled people looking for work
- Face to face assessments: An increase in in person health benefit assessments
- Fraud and error: Measures projected to save £14.6 billion over this parliament
- Universal Credit rebalancing: Changes to the taper rate structure to remove what the government describes as perverse incentives away from work
Key Takeaways
- VAT now applies to optional advance payments on Motability leases, and IPT to new leases, both changes took effect on 1 July 2026
- The reforms are projected to save £1 billion by 2030, as part of a wider package expected to save nearly £2 billion by end of decade
- The core Motability package is unchanged, eligible disabled people retain their £77.05 weekly award and access to a vehicle, scooter, or powered wheelchair with no advance payment required
- Wheelchair Accessible Vehicles are excluded from both tax changes, existing leases are unaffected
- The Motability Foundation continues to offer means tested grants for people who need additional financial support