Certain drivers will be hit with a £400 rise after a major rules change introduced by Rachel Reeves. The Motability Scheme is set for new updates in 2026, with motorists set to be hit with higher financial penalties.
The current VAT exemption on Advance Payments will be removed for new leases starting from July 1, 2026. Instead, any upfront payments for the high-end vehicles will be hit with a standard 20% VAT rate. Meanwhile, Motability leases will no longer be exempt from Insurance Premium Tax (IPT), which motorists will have to pay at around 12%.
The new fees are expected to add around £400 to Motability bills, with all of the updates confirmed during Rachel Reeves’ Autumn Budget.
Motability Scheme CEO, Andrew Miller said: “The Government has announced some tax changes that influence how we run the Motability Scheme. These include VAT on Advance Payments and Insurance Premium Tax. Both will be included on Scheme leases from July 2026.
“These tax changes increase the overall cost of providing the Scheme. That’s why we’re reviewing how the Scheme works, so we can absorb these costs where possible.”
He added: “As we pass on savings from tax exemptions to customers pound for pound, VAT on Advance Payments will increase costs. Our plan is to make changes so we can absorb these costs where possible. The VAT changes are coming in from July 2026, so there will be no immediate impact on our prices.
“In the meantime, we will continue to review our prices every three months to make sure we’re offering you the best value we can. The next update will be on 1 January.”
The Motability programme is a popular UK scheme allowing disabled people to lease a new car in exchange for their mobility allowance. Motorists can gain access to the scheme if they are in receipt of a qualifying mobility allowance with at least 12 months left.
Applications can be made online, with road users then able to collect their vehicle from a dealer. But despite the new rules, existing Motability leases will remain unaffected by the latest updates.
It means that any of the new tax changes will not affect customers who already had a leasing agreement in place before July 1, 2026.