New VAT and Insurance Premium Tax rules will increase costs for Motability Scheme applications from 1 July 2026, with changes to mileage allowance and tyre replacement limits

The Motability Scheme is set to undergo significant changes as updated regulations drive up costs from July. The alterations stem from tax adjustments announced in the Labour Government’s Autumn Budget last year, which will have a direct impact on the scheme.

From 1 July 2026, VAT and Insurance Premium Tax (IPT) will apply to leases on the DWP Motability Scheme. Consequently, leasing a vehicle will become considerably more expensive, and the overall cost of delivering the Scheme will rise substantially.

There are several key points to note. The changes apply to new applications submitted on or after Tuesday, July 1 2026. The organisation states: “When considering changes, priority has been given to protecting what matters most to disabled people, reducing the impact of the tax changes as far as possible and providing good value.

“Alongside Motability Operations, we remain dedicated to providing the Motability Scheme now, and for years to come, with a continued strong focus on customer service, affordability and choice.”

VAT

For those who currently hold a lease, Motability officials confirm that nothing will change for the time being, reports Birmingham Live.

Where VAT is applied to a lease, it will not affect the lease payments deducted from your mobility allowance. Rather, VAT will be charged at the standard rate on other lease costs including your Advance Payment, excess mileage fees and early termination charges.

Mileage allowance

Regarding mileage allowance, new leases will feature:

• Cars: 30,000 miles across three years
• Wheelchair Accessible Vehicles: 50,000 miles across five years

Officials report that roughly three-quarters of customers travel within this revised allowance, with a typical annual mileage of around 7,500 miles. Those who exceed this limit will have the option to purchase additional miles, the foundation confirms.

It added: “We recognise that some customers may need to drive more miles for a variety of reasons, and we are currently looking at ways we may be able to mitigate the impact of these changes for customers in some limited exceptional circumstances.”

Tyre replacement

On tyre replacement, from 1 July, a Scheme lease will cover:

• Up to six tyres during a three-year lease, with up to four replacements available for accidental damage
• Up to 10 tyres during a five-year lease, with up to six replacements available for accidental damage

Most customers require two tyre replacements over the course of a three-year lease, and these updated limits have been set to reflect what the vast majority of drivers need through standard use, the foundation states. With regard to EU breakdown cover, drivers will still be permitted to take their vehicle abroad, but must request a VE103 form from the RAC and pay an administration fee.

EU breakdown cover

In the previous year, fewer than one per cent of customers made use of EU breakdown cover. For those already holding a lease, Motability representatives confirm that nothing will change during your current agreement at this stage.

They stress that these modifications apply solely to new applications made from 1 July 2026 onwards.