Rachel Reeves is preparing to save more than a billion pounds by targeting disabled people’s capacity to get cars through the benefits system.
The chancellor is examining reforms to the Motability scheme that are designed to save money and maintain public confidence in the welfare system.
Tax breaks worth about £1 billion a year are set to be scrapped in the budget, dramatically reducing an exemption by which cars leased under the scheme do not have to pay VAT or insurance premium tax.
In another change being considered, BMWs, Mercedes and other luxury cars could be removed from a scheme that provides such premium brands to more than 40,000 benefits claimants.
Reeves is said to be less likely to go further next month and restrict which benefits recipients are eligible for free cars. But such moves are being examined as part of longer-term reforms to reduce incentives to claim, and deal with mounting criticism of the scheme.
Disability groups have criticised the proposed changes to Motability, saying they would make life more expensive for people with serious health conditions.
There is nervousness in government about targeting welfare again after a revolt by Labour MPs forced Reeves to abandon £5 billion in benefit cuts over the summer.
• ‘Biggest benefits scam of all’? Motability boss hits back at critics
However, before a budget where she is expected to have to raise taxes by more than £20 billion, Reeves is keen to signal to markets that she is capable of making cuts and dealing with inefficient government spending.
Government sources insisted the reforms were about fairness rather than purely cost-cutting, pointing out that Motability made £748 million in profit in 2023 and its chief executive was paid £658,000 last year. But the company made a £565 million loss in 2024.
Taxpayers give £2.8 billion a year to Motability, a scheme that allows disability benefits claimants to exchange their mobility allowance for a new car. Use of the scheme has increased by more than a third since 2017 and the company accounts for one in five new cars sold in Britain.
As the cost of sickness benefits rise, the scheme has attracted criticism and fears that online “sickfluencers” are offering coaching on how to apply for expensive cars through the scheme. The Times revealed last month that 43,512 cars made by BMW, Audi and Mercedes were being leased through the scheme, about 5 per cent of the total.
• Stop allowing luxury car purchases on Motability scheme, ministers urged
But Emma Vogelmann, co-chief executive of the disability group Transport for All, said: “As disabled people we often find public transport is unusable — broken pavements, non-existent bus routes, and packed stations we can’t navigate. A Motability car changes that — it allows us to work, shop, and do the school run. Scaling back the scheme would lock disabled people away from daily life. Does the chancellor want to take away our freedom?”
James Taylor of the charity Scope warned that scrapping tax breaks “could heap extra costs onto disabled people all over Britain. Restricting eligibility to Motability could hit disabled people on lower incomes hard.”
No decision has been made and government sources stressed that the impact on disabled people was being examined as part of a live discussion on the issue. But there is concern in government that the scheme acts as an incentive to claim, and that rising numbers claiming cars for mental health problems and milder conditions have undermined faith in the benefits system. Ministers believe targeting the scheme is likely to provoke less of a backlash than other benefit cuts.
James Lawson, chairman of the Adam Smith Institute, said: “Most taxpayers can only dream of driving a brand new Alfa Romeo or Mercedes. They should not be forced to pay for one for people on benefits.”
• Alice Thomson: Motability scheme takes taxpayers for a ride
He added: “With welfare costs already spiralling out of control and little fiscal headroom, the chancellor must use this budget to rein in wasteful spending. Abolishing its £1.2 billion in tax reliefs, and scrapping the provision of new and premium models would be a good first step.
“However, if politicians are serious about restoring fairness to our welfare system, they must go further. This means tightening PIP mobility criteria, particularly for mental health claims, breaking Motability’s monopoly on provision and restoring government oversight.”
In a paper for the free-market think tank, a former head of Motability at the Department of Work and Pensions called for reforms such as restricting tax breaks to wheelchair-adapted vehicles, which make up only 10 per cent of the scheme, and opening the scheme up to competition.
Basic cars are available at no upfront cost, but about 85 per cent of claimants opt to upgrade their vehicles by making upfront payments. The maximum upfront payment is £7,999 for cars including the Audi Q4 Sportback, Mercedes-Benz CLA Coupé and BMW i4. On the road prices for such vehicles often exceed £50,000.
Motability insists that it operates at no additional cost to taxpayers as claimants exchange the higher-rate mobility element of personal independence payments for a lease. The company also argues that premium brands created “competitive tension” and that, since PIP is not means-tested, there was no reason why claimants should not use their own money to get a better car.
Kemi Badenoch, the Tory leader, has pledged to “restrict Motability vehicles to people with serious disabilities”, telling the party’s conference this month: “Those cars are not for people with ADHD.”