Rachel Reeves is considering scrapping tax breaks for disability benefit claimants to raise £1.2bn a year, The Telegraph understands.
Around 800,000 claimants who qualify for a brand new car under the taxpayer-subsidised Motability scheme are currently exempt from VAT and insurance premium tax (IPT).
But the reliefs are set to be axed as the Government scrambles to fill a black hole in the public finances of as much as £50bn.
A senior Labour source told The Telegraph “lots of things” were being looked at ahead of the Budget on Nov 26.
The Motability scheme allows certain welfare recipients to trade their benefits for a new car. They must pay upfront for any cost that exceeds the value of their benefits.
Removing the tax breaks would mean more claimants would need to make an advance payment for their cars, which would boost tax receipts by an estimated £1.2bn. The scheme currently costs taxpayers £2.8bn a year.
The charity responsible for the scheme, the Motability Foundation, said that the average lease price would increase by £6,500 if VAT was passed on in its entirety.
More than 800,000 claimants have a Motability car and the number eligible for the scheme has risen by more than half a million since 2019.
Those who are eligible for the enhanced rates of personal independence payment (PIP) or the disability living allowance (DLA), alongside other benefits, can exchange all or part of their benefit for a brand new car. The benefit is then paid directly to Motability.
The scheme covers car insurance, breakdown cover and servicing, as well as vehicle excise duty (VED) from the monthly payments.
Cars worth up to £35,000 can be paid for solely from the eligible benefit. For cars worth more than the threshold, claimants are required to make an advance payment.
The Chancellor is said to also be considering removing some cars from the scheme. There are approximately 900 models available, some which retail for more than £50,000.
BMWs, Mercedes, and other luxury cars – currently provided to more than 40,000 claimants – could be removed, The Times reported.
For a £7,999 advance payment and their entire weekly PIP allowance, claimants can lease a £52,870 BMW i4 electric car. A Mercedes-Benz GLA can be leased for three years with an advance payment of £3,999.
In 2024, 170,000 new drivers signed up for Motability, with 220,000 renewing their leases.
Because Motability only provides new cars, this means 390,000 cars were bought and provided by the scheme.
Motability scheme users are also exempt from IPT, a tax paid by customers when they take out insurance policies. Drivers with a Motability car have their insurance covered by the scheme, but would otherwise pay a 12pc charge.
Kemi Badenoch, the leader of the Conservative Party, has previously pledged to restrict Motability to those with serious disabilities, adding: “Those cars are not for people with ADHD.”
Elliot Keck, of the TaxPayers’ Alliance campaign group, said: “It’s right that the Government is reviewing tax exemptions on Motability vehicles. Support for those who genuinely need help to stay mobile must remain but it’s clear that this scheme has drifted beyond its original purpose.
“There’s a big difference between helping disabled people get around and giving tax breaks for expensive cars and add-ons to those gaming the system.”
The Treasury declined to comment, with a spokesman saying: “We do not comment on Budget speculation.”
A spokesman from the Motability Foundation said: “The Motability Scheme provides a vital service to disabled people, helping them to overcome significant mobility barriers.”