The Department for Work and Pensions (DWP) has confirmed that new tax changes to the Motability Scheme came into force on July 1, 2026, with ministers estimating the reforms will save taxpayers approximately £1 billion by 2030.
Details of the New Tax Rules
Under the updated rules, VAT will now be charged on advance payments made by customers who choose a more expensive vehicle. Additionally, Insurance Premium Tax will apply to new leases. The DWP stated that these changes do not affect eligibility for the scheme, and disabled individuals will continue to receive their full enhanced mobility benefit, currently set at £77.05 per week. Many vehicles remain available with no advance payment required.
Background and Government Rationale
The reforms were first announced in the Autumn Budget and are part of a broader welfare reform package expected to save nearly £2 billion in total by the end of the decade. Work and Pensions Secretary Pat McFadden said: "These changes are driven by the fairness that underpins this Government – fairness for the taxpayer, fairness for disabled people, and fairness for the country." He added: "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."
Removal of Luxury Vehicles
Following the Budget, the Government also decided to remove luxury vehicles, including BMW and Mercedes models, from the Motability Scheme. Ministers stated this move aims to return the scheme to its original purpose of providing practical transport rather than subsidising premium models.
What Remains Unchanged
The DWP confirmed that the core Motability package remains intact. Eligible customers will still have access to a car, scooter, or powered wheelchair, along with insurance for up to three named drivers, servicing, maintenance, and breakdown cover. There are no changes to existing leases, no changes to eligibility for Personal Independence Payment (PIP) or the Motability Scheme, and the reforms do not apply to Wheelchair Accessible Vehicles. For those who may struggle with advance payments or vehicle adaptations, the Motability Foundation continues to provide means-tested grants.
Broader Welfare Reforms
The Motability changes are part of a wider government welfare reform programme, which includes increased face-to-face health assessments, expanded employment support for disabled people, a new Right to Try Work Guarantee, and measures to reduce fraud and error across the benefits system.
