Policy paper

Motability Scheme: reforming tax reliefs

Published 26 November 2025

Who is likely to be affected

From 1 July 2026 onwards, qualifying schemes which lease vehicles to eligible disabled people will be impacted, the only current example of which is the Motability scheme, as well as businesses which provide insurance to qualifying schemes.

General description of the measure

The measure relates to qualifying schemes, the only current example of which is the Motability scheme, which lease vehicles with preferential tax treatment to disabled people in receipt of eligible welfare benefits.

VAT

Eligible benefits paid to recipients by the Department for Work and Pensions, the Ministry of Defence, Social Security Scotland, or the Department for Communities (Northern Ireland) can be used to cover the cost of leases. This part of the payment will be disregarded in terms of valuing the supply for VAT purposes, meaning no VAT will be applied to it. However, the measure will remove the VAT zero-rate on top-up payments, made in addition to the transfer of eligible welfare benefits, for those who pay more to lease higher value vehicles. This top-up payment will be subject to the standard rate of VAT (20%).

These changes will have no impact on the existing zero rate for vehicles designed or substantially and permanently adapted for wheelchair or stretcher users. Top-up payments for such vehicles will therefore remain zero-rated.

Insurance Premium Tax

This measure restricts the Insurance Premium Tax (IPT) exemption for insurance on vehicles leased through qualifying motor vehicle leasing schemes. Once changes take effect, the exemption will apply only to insurance contracts relating to vehicles that are substantially and permanently adapted for wheelchair or stretcher users, or originally designed for their use, where leased through a qualifying scheme. All other vehicles provided through such schemes will be subject to IPT at the standard rate of 12%.

The liability of insurance relating to all vehicles provided through leases entered into prior to 1 July 2026 will remain exempt.

Policy objective

The policy objective for the measure is to promote fairness and value for money for taxpayers. VAT changes restrict tax reliefs for more expensive vehicles provided under qualifying schemes, while IPT changes bring the tax treatment of qualifying schemes in line with other commercial lease providers.

Background to the measure

The measure was announced at Budget 2025 and included in Finance Bill 2025-26.

Detailed proposal

Operative date

The measure will have effect from 1 July 2026 and will apply to new leases of vehicles from that date.

Current law

Current law on the VAT zero-rating of leases under qualifying schemes is contained in Item 14 of Group 12 of Schedule 8 Value Added Tax Act 1994. Current law for the Insurance Premium Tax exemption for qualifying schemes is contained in Item 3 of Schedule 7A of the Finance Act 1994.

Proposed revisions

VAT

This measure removes the zero-rate in Item 14. This has the effect of making the lease of a qualifying vehicle taxable at the standard rate of VAT.

The measure also adds a new provision to Schedule 6 of the Value Added Tax Act, disregarding the element of the payment for the lease that is provided by a customer’s benefit entitlement for the purposes of valuing the supply resulting in no VAT charge in respect of that element of the payment.

Insurance Premium Tax

This measure will substitute Item 3 of Schedule 7A of the Finance Act 1994 with a new Item 3. The new Item restricts the exemption to insurance for vehicles substantially and permanently adapted for wheelchair or stretcher users, or originally designed for their use, where provided through qualifying schemes and where these vehicles are provided through leases entered into on or after 1 July 2026.

Insurance relating to other motor vehicles provided through qualifying schemes will become liable to the Standard Rate of IPT at 12%.

Summary of impacts

Exchequer impact (£ million)

2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030	2030 to 2031
nil	+90	+165	+225	+280	+305

These figures are set out in table 4.1 of Budget 2025 and have been certified by the Office for Budget responsibility. More details can be found in the policy costings document published alongside Budget 2025.

Macroeconomic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

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.

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.

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.

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.  

Customer experience of HMRC services is expected to remain the same as this measure does not alter how individuals interact with HMRC.

Equalities impacts

An individual may be affected by this measure regardless of their protected characteristics. If a protected group is overrepresented in this population, then it will be disproportionately impacted. This measure only affects households that include individuals receiving disability benefits. As a result, disabled people are disproportionately impacted. The population of those in receipt of eligible disability benefits are estimated to be older, with half of those eligible aged 55 or over. The population is also estimated to contain slightly higher proportions of women, and those from a White ethnic background, compared to the UK adult population.

For impacted individuals the value of eligible benefits will not be affected and 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. It is expected that there will continue to be a broad range of vehicles available which do not require a top-up payment, reducing the impacts on affected groups.

Where data were available no other group with shared protected characteristics was estimated to be overrepresented in the population affected by this measure.

Administrative impact on business including civil society organisations

This measure is expected to have a negligible administrative impact on qualifying schemes, of which the only current example is Motability. One-off costs could include familiarisation with the new VAT treatment of lease payments, potential updates to systems and training staff to apply the new treatment. Ongoing costs could include doing more calculations to apply the correct VAT treatment to each payment, and providing HMRC with more information about VAT charged on supplies.

This measure is expected to have a negligible administrative impact on insurers who underwrite insurance for qualifying schemes which currently qualify for the IPT exemption. There is currently only one insurer who underwrites such insurance. One-off costs could include insurers familiarising themselves with the new tax treatment. These costs may include new administrative processes, systems change or upskilling of staff, to account for the change in tax treatment of relevant risks. Continuing costs will include performing apportionment calculations to account for exempt and taxable elements of insurance relating to qualifying schemes. 

This measure is expected overall to affect the scheme provider’s experience of dealing with HMRC, as the change is complex and requires more administrative tasks to be completed. This will be mitigated by the publication of clear guidance explaining the new policy. This measure is expected to have no overall impact on insurers’ business’ experience of dealing with HMRC as the change alters the tax treatment of a single insurance policy.

Operational impact (£ million) (HMRC or other)

HMRC will not incur operational costs in implementing this measure.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through communication with scheme providers.

Further advice

If you have any questions about this change, for VAT queries contact David Webb on Telephone: 03000 585994 or email: david.webb@hmrc.gov.uk. For IPT queries please contact Russell Langford-Smith at russell.langford-smith@hmrc.gov.uk.