Motability Scheme Changes from July 2026

From July 1, 2026, the Labour government is implementing major tax changes to the UK Motability Scheme, primarily through the Finance Act 2026 (sections 80-81), by applying standard VAT and Insurance Premium Tax (IPT) to most new leases. These changes effectively revise VAT law (Item 14 of Group 12, Schedule 8, VAT Act 1994) to reduce VAT exemptions for the scheme. [1, 2]

Key Legal and Tax Changes (Effective 1 July 2026)

• VAT on Leases: The current VAT zero-rating for qualifying Motability leases is removed. Most new leases will now be subject to standard VAT rates, affecting both Advance Payments and weekly lease costs.
• Insurance Premium Tax (IPT): Revisions to Item 3 of Schedule 7A of the Finance Act 1994 mean that IPT exemptions are restricted.
• WAV Exemption: VAT will not be added to wheelchair-accessible vehicles (WAVs), which remain exempt.
• Valuation Changes: A new provision in Schedule 6 of the Value Added Tax Act is introduced to disregard the element of the payment provided by a customer's benefit entitlement, mitigating some VAT charges. [1, 2, 3]

Resulting Scheme Changes
In response to these government mandates, the Motability Foundation and Motability Operations have introduced the following: [1]

• Mileage Reduction: Annual mileage allowance for most new customers is reduced from 20,000 to 10,000 miles.
• Higher Excess Charges: Excess mileage charges are increasing from 5p to 25p per mile.
• Vehicle Restrictions: "Luxury" cars, including brands like BMW, Audi, and Mercedes, and all convertibles/coupes were removed from the scheme on November 25, 2025.
• Reduced Support: Overseas breakdown cover has been removed, and tyre replacement limits have been altered. [1, 2, 3, 4]

These changes aim to keep the scheme sustainable despite the tax increases, which are expected to raise average Advance Payments by approximately £400 over a three-year lease, say Motability Operations and Disability Rights UK. [1, 2]