Motability Tax Changes In The 2025 Budget
What Has the Government Announced For The Motability Scheme?
By: James Reeve
Posted on 26th Nov 2025 | Updated 26th Nov 2025
The Government has announced plans to change the way the Motability Scheme is taxed. Although the reforms are more limited than initially feared, they are still expected to increase costs for many disabled drivers who rely on the Scheme for affordable, worry-free motoring.
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Table of Contents1.VAT To Apply To Motability Advance Payments
2.Insurance Premium Tax To Be Applied For The First Time
3.Premium Brands Removed From The Scheme
4.Impact On Motability Advance Payments Still Unclear
5.Motability’s Response
6.MotaClarity Will Keep You Updated
VAT To Apply To Motability Advance Payments
VAT relief on upfront Advance Payments will be removed for all new Motability leases from July 2026. From then on, these payments will be subject to the standard 20% VAT rate, a change that is likely to increase upfront costs for many customers.
An Advance Payment is the extra amount some customers pay at the beginning of a Motability lease if the vehicle they want costs more than the qualifying weekly Mobility Allowance (currently £77.05) covers. It’s a one-off payment that lets customers choose bigger, better-equipped and more expensive vehicles.
Importantly, Wheelchair Accessible Vehicles (WAVs) will remain exempt, meaning the VAT change will not apply to these vehicles.
There will be two additional changes to how the Motability Scheme operates: the annual mileage cap will be reduced from the current 20,000 miles, and breakdown cover for overseas travel will no longer be included as part of the standard lease package.
Insurance Premium Tax To Be Applied For The First Time
The Chancellor, Rachel Reeves, will also levy Insurance Premium Tax (IPT) on the all-inclusive insurance cover provided by the Motability Scheme. This will be the first time IPT has ever been applied to the Scheme.
Because each Motability lease currently bundles insurance, maintenance, MOTs, breakdown cover and tyre replacement into a single fee, adding IPT is expected to bump up overall running costs. Unless absorbed by the Scheme, these added costs are highly likely to be passed on to customers.
According to the Government’s Budget 2025 forecasts, the combined tax changes are projected to save the Treasury over £1 billion over the next five years.
Read the 2025 Budget Report
Read Motability Scheme: Reforming Tax Reliefs
Motability Scheme Changes In The Budget 2025
Premium Brands Removed From The Scheme
In addition to the new tax changes, Motability announced yesterday that several premium car brands will no longer be available to its customers. The brands removed from the Scheme are:
Alfa Romeo
Audi
BMW
Lexus
Mercedes-Benz
Motability says the change is intended to shift the fleet toward vehicles that ‘meet disabled people’s needs and represent value and purpose,’ focusing on reliability, lower running costs and accessibility rather than luxury.
Motability Scheme Removes Premium Brands And Sets Major New Target For UK-Built Cars
Impact On Motability Advance Payments Still Unclear
Even these limited tax changes are likely to push up costs for disabled motorists. Both the VAT changes and IPT on insurance will increase Motability’s operating costs, and the Scheme typically reflects these changes through its quarterly pricing.
What remains unclear is how much Advance Payments will rise, and which types of vehicles could see the biggest increases. Customers who rely on larger or more expensive vehicles may be more exposed to price changes than those choosing smaller models.
Before the Budget, several disability charities warned that adding VAT and IPT would increase the cost of even the cheapest cars, potentially making the Scheme unaffordable for people on low or fixed incomes.
It also remains unclear how, or whether, the Government’s new tax proposals for electric vehicle (EV) drivers will impact people using the Motability Scheme.
Addressing criticism that Motability has sometimes been used to lease premium vehicles, Reeves told MPs during her budget statement: “The Motability Scheme was set up to protect the most vulnerable, not to subsidise the lease on a Mercedes-Benz, so I am making reforms that will reduce generous taxpayer subsidies.”
Motability’s Response
In a statement issued after the Budget, Andrew Miller, CEO of Motability Operations, said the organisation will adapt the Scheme to manage the impact of the Government’s tax changes and ensure it remains sustainable in the long term.He added that over the next six months, Motability will be ‘looking at what we include, how we manage costs and how we make sure the Scheme stays sustainable for the long term.’