Motability scheme tax breaks set to be scrapped in upcoming budget

The Motability scheme, which provides disabled people with access to new vehicles by allowing them to allocate their personal independence payment benefit towards a three year car lease, faces significant changes in the upcoming budget. Rachel Reeves, the Chancellor, is poised to eliminate approximately £300 million in tax reliefs for the scheme, impacting the cost and accessibility for participants.

The government has been reviewing tax breaks for Motability and considered options that could potentially offer savings up to £1 billion. However, ministers have decided against the most drastic measures due to concerns about destabilising the programme. The budget will introduce an insurance premium tax on Motability cars and impose VAT on advance payments for higher-value vehicles, both measures likely to increase lease costs for users. The plan will not include removing VAT exemptions on the sales of former Motability vehicles, after warnings this step could jeopardise the scheme’s viability.

The Motability scheme is operated by a private company overseen by a charity. It purchases new vehicles and leases them to eligible claimants, who must receive the enhanced mobility component of personal independence payment or certain other qualifying benefits. After three years, the vehicles are sold, helping to fund the ongoing operation of the scheme. Recent policy has excluded luxury brands, including BMW and Mercedes, from Motability eligibility. These higher-end brands previously accounted for about five percent of the 800,000 participating vehicles, with some claimants making advance payments to access premium models.

Recent changes and the proposed tax increases have provoked concern among disability advocates and several Labour Members of Parliament, who warn of increased expenses for disabled people reliant on car mobility. Critics have highlighted the negative framing of the scheme in sections of the press, where it is mischaracterised as providing “free cars” for benefit claimants. In reality, vehicles are funded directly from individuals’ benefits, further complicating the public debate over the necessity and fairness of further changes.

The forthcoming budget will also include broader welfare reforms and a fraud crackdown, set against the backdrop of growing disquiet within the Labour Party over its polling performance and policy direction. The Motability changes are seen by some as a test for the government’s commitment to supporting disabled people while seeking fiscal prudence and system reform.