Motability Scheme Tax Changes: What You Need to Know About VAT and Insurance Premium Tax

Following our recent feature on the new face of premium Motability, we want to make sure every Richmond Motor Group Motability customer has a clear picture of the financial changes coming in 2026 - and what they mean for you personally.

As part of the Autumn Budget 2025, Chancellor Rachel Reeves announced reforms to the tax reliefs that have historically supported the Motability Scheme. The Treasury has framed these changes to “focus support on the scheme’s core objectives” - namely, ensuring that practical, accessible vehicles remain available to disabled people who rely on the scheme most.

Two specific tax changes will come into effect for new leases starting from 1 July 2026:

1. VAT on Advance Payments

Currently, the Advance Payment you make when choosing a vehicle that costs more than the standard weekly allowance covers is exempt from VAT. From 1 July 2026, that exemption ends. The standard rate of VAT, 20%, will apply to Advance Payments on new leases.

To put that in practical terms: Motability Operations estimates that the average Advance Payment will increase by approximately £400 over a three-year lease as a result. This will vary depending on the vehicle you choose. Many vehicles on the scheme - around 40 to 50 models - are available with no Advance Payment at all, and those customers will not be affected in this respect.

2. Insurance Premium Tax on Motability Scheme Insurance

The Motability Scheme has always included comprehensive insurance as part of the lease package - one of its most valued features. Until now, that insurance has been exempt from Insurance Premium Tax (IPT). From 1 July 2026, IPT at the standard rate of 12% will be applied to insurance contracts on new Motability leases.

It is important to be clear about what these changes do not affect:

• Wheelchair Accessible Vehicles (WAVs) remain entirely exempt from both the VAT and IPT changes. The tax changes do not apply to vehicles designed or substantially and permanently adapted for wheelchair or stretcher users.
• Existing leases are completely unaffected. If you are already in a Motability agreement, nothing changes for you until your next renewal.
• VAT on weekly lease costs and VAT on vehicle resale remain in place; these reliefs are not being removed.
• Disability benefit payments and PIP eligibility are entirely separate from these changes and are not affected.
• Vehicle Excise Duty (VED) - often called road tax is also not changing as a result of the Autumn Budget for Motability Scheme customers.

At Richmond Motor Group, supporting our Motability customers is something we take seriously. Our teams across all our sites are fully up to speed with these changes and are ready to talk you through how they might affect your next agreement, what vehicles are available within your budget, and how to make the most of the scheme as it evolves.

To speak with a Motability specialist, please contact your nearest Richmond dealership or visit us in person. We are always happy to help.

Tax rates and scheme details correct as of the date of publication. Motability Scheme terms, pricing and vehicle availability are subject to change.