What is Formula 1's cost cap? What it covers, penalties and more

The first-year report on the cost cap was finally published in October 2022. Most teams were found to have complied, but Williams and Aston Martin were picked up for “procedural” breaches – to do with financial reporting – and Red Bull was found to have overspent.

Red Bull was fined $7m (£6.05m) and had its aerodynamic testing allowance cut by 10% for a year  as a result of spending £1.864m (1.6%) above the cap, which was classified as a minor breach (of less than 5%). Not all rivals were content. Lewis Hamilton pointed out that even a small overspend could have a significant effect — particularly in the close 2021 season where Max Verstappen controversially beat him after the final race in Abu Dhabi. Hamilton claimed that he could have won the 2021 title if Mercedes had spent an additional $300,000 (£270,000).

The cost cap was one of three key measures introduced to make F1 more equal and deliver closer, more unpredictable racing. Along with the spending limit came more stable funding, as a new commercial rights agreement shared F1 revenue more evenly between teams. The new 2022 technical regulations then introduced ground effect to allow cars to follow — and fight — more closely.

Scroll down for an in-depth look at the cost cap and how it works.

What is the cost cap?

The cost cap limits how much each F1 team can spend in a single season in a bid to level the playing field across the grid and make the sport more financially sustainable.

It applies to most salaries, car development costs and race weekends, including transport, but does not apply to the cost of buying in an engine, for customer teams, or developing a power unit for factory teams (this is subject to separate cost restrictions).

After years of different proposals, the $145m cost cap first came into force for the 2021 season, as teams were working on the following year’s new-generation car. The spending ceiling will reduce by $5m a year for the following two seasons. Development costs should be lower as technical rules remain almost unchanged, and the lowering cap is expected to push teams to greater efficiencies.

How much is the cost cap?

When Formula 1 first introduced its cost cap in 2021, the maximum annual budget was set at $145 million (£108m) per team, aimed at reducing the spending disparity between the grid’s frontrunners and backmarkers.

This figure has gradually decreased over subsequent seasons, but inflationary adjustments have since become a regular part of its annual application.

Here’s how the cap has evolved:

2021: $145 million

2022: $140 million (with a 3.1% inflation adjustment mid-season)

2023 onward: $135 million baseline, adjusted annually for inflation

As of 2025, the base figure remains $135 million (£100m), but adjusted for inflation, the effective cap for this year is approximately $140.4 million (£105m). The final number is confirmed before each season begins by the FIA’s Cost Cap Administration.

Teams are also granted additional allowances based on calendar length. For every race beyond 21 rounds, the cost cap increases by $1.8 million per additional Grand Prix. This figure was previously $1.2 million.

A major change is expected in 2026, with the cost cap set to increase substantially to $215 million (£160m) to accommodate new regulations, as cost categories currently exempt from the cap (such as certain capital investments and HR costs) are scheduled to be brought under stricter control.

Questions over the cost cap

After the intense scrutiny surrounding Red Bull’s breach in 2021, the FIA welcomed a much-needed period of relative calm.

For both the 2022 and 2023 financial reviews, the FIA’s Cost Cap Administration found that all 10 Formula 1 teams were fully compliant with the cost cap regulations. This move has helped reinforce the credibility of financial governance in the sport.

However, the atmosphere off track remains far from settled. Persistent doubts linger about whether factory-backed teams with other ventures – such as road car divisions – could use innovations or R&D from outside their F1 operation to gain an edge without charging these advances to their capped F1 budgets.

In response to ongoing concerns, the FIA issued a new technical directive requiring teams to include in their declared budget the cost of any intellectual property (IP) transferred into Formula 1 from external, non-F1 projects or arms of their wider companies.

This move, widely regarded as “closing a loophole,” is designed to ensure that advances developed in non-F1 divisions – such as hypercar projects or commercial engineering subsidiaries – cannot be imported into F1 cars without full financial transparency.

Despite robust regulation and auditing, suspicion remains among the teams. Some in the paddock question the frequency and sophistication of updates being introduced by rivals – especially factory squads with considerable resources. There is concern that rapid in-season development and major investments in factories or infrastructure might still elude the full net of the cap, even with new IP rules.

As Formula 1 looks ahead to a major regulatory overhaul in 2026, the debate over effective financial policing – and the balance between competitive innovation and fair play – remains a live topic in the championship.

What does the cost cap cover?

The cost cap covers most performance-related spending, including:

• Car design and development
• Components and manufacturing
• Race operations
• Wind tunnel and CFD operations
• Team personnel involved in performance

The most crucial area of these cost cap rules is car development: teams must now make crunch decisions on which parts to develop, how much to spend on these parts and how many they need – all the while keeping it under the budget cap.

The cost of repairing accident damage or replacing failed parts all comes out of the budget cap, so a few unfortunate races can make a significant dent to upgrade plans.

What does the cost cap not cover?

A number of standout costs are not included in the budget cap, which are:

• Driver salaries
• Salaries of the top three team executives
• Marketing and hospitality
• Property and capital expenditure
• Power unit development (covered under a separate cap – see below)

Discussions are ongoing ahead of the 2026 regulatory overhaul to reduce the number of exemptions, with the aim of leveling the financial playing field further by bringing more operational areas inside the scope of the cap.

Engine manufacturers operate under a separate cost cap, currently set at $95 million per season – increasing to $130 million from 2026, when a new generation of power units will be introduced.

Notably, special provisions have been approved for new entrants such as Audi, launching in 2026, to account for differences in labor cost in regions like Switzerland. This ensures that local wage structures do not unfairly penalise certain manufacturers under the engine cost cap.

What is the penalty for breaking the cost cap?

Penalties have not been clearly set out, partly to avoid a situation where teams see the benefits of breaching the cost cap outweighing the penalty that they would face.

Another factor is that points deduction penalties only apply to the season in which the breach occurred, resulting in a season where championships could be changed almost a year after they seemed to be decided.

If a team makes an overspend of under 5%, then that is classed as ‘minor’ breach and can be penalised with fines, points deductions or development restrictions. Anything more and it is a ‘major’ breach, which is likely to attract more severe penalties and could result in a team being thrown out of the championship.

The potential penalties could be one or more of the following:

Who decides the cost cap penalties? 

It was originally stated that any break of the cost cap would have penalties decided by the Cost Cap Adjudication Panel, where the full range of penalties could be applied.

However, with the recent Red Bull cost cap breach, the FIA prevented things reaching that stage by offering an ‘Accepted Breach Agreement’, essentially a negotiation process which exists in the financial regulations.

An ABA can include smaller financial penalties, limit participation in some sessions and aerodynamic testing.

Williams’ procedural breach – essentially an issue with its financial reporting – was negotiated via an ABA and resulted in a $25,000 breach for the Grove team.

Some of the more severe penalties for cost cap breaches, including a points deduction and a reduction in a future cost cap, are excluded with an ABA.

The agreement allows both parties to move on swiftly, as there is no appeal process.

Red Bull’s cost cap breach

If the end of the 2021 F1 season wasn’t controversial enough — as Michael Masi dispensed with safety car procedure at the Abu Dhabi Grand Prix to engineer a final lap of racing and all-but guarantee Max Verstappen would win the racer and championship — there was still a sting in the tail.

In October last year, the FIA revealed that Red Bull had overspent in the 2021 season as a result of procedural errors. Most of these related to administrative functions, such as catering, social security and travel costs, but they also included payments made to the Red Bull Powertrains division.

Defined as a ‘minor’ overspend, the breach totalled £1.864m and was resolved with an ‘Accepted Breach Agreement (ABA)’ negotiated between the FIA and Red Bull.

The team was fined $7m (£6.05m) and had its aerodynamic testing allowance cut by 10% for a year — a penalty that comes to an end this October.

How is the cost cap monitored?

Formula 1 teams are required to submit their complete financial documentation for the previous season to the FIA by March 31 each year.

This paperwork must provide a detailed account of all costs and expenditures relating to their F1 operations, and typically stretches to hundreds of pages including audited financial statements, supporting documents, and evidence for each line item.

The process is far from a one-off annual task. Teams are in active, ongoing dialogue with the FIA’s Cost Cap Administration throughout the year. These continuous interactions are essential for:

• Interpreting how accounting standards apply to F1’s unique, complex business structures.
• Receiving case-by-case guidance on areas like staff welfare (including maternity and sick pay), as well as on how expenditures that benefit multiple seasons (for example, major infrastructure or long-term R&D programs) should be reported under the regulations.
• Ensuring clarity on how to allocate and apportion costs associated with shared business ventures or affiliated projects, in line with recent technical directives covering intellectual property and linked companies.

The FIA’s review process involves substantial auditing and can require extensive exchanges between each team’s finance departments and the Cost Cap Administration. Teams with broader business activities, such as engine or road car divisions, face especially detailed scrutiny:

• The FIA conducts on-site audits and cross-checks of non-F1 activities to ensure full compliance and to examine any transactions or shared resources between affiliated entities.
• These investigations mean the review and final sign-off for annual compliance often isn’t published until late summer or early autumn—about half a year after submissions.

Each year brings updates both to the financial rules and to the official FIA guidance, reflecting new interpretations and lessons learned from teams’ evolving business models. New technical directives, for instance, may specify how to handle costs for multi-year investments or clarify grey areas in light of real-world cases.

The system remains dynamic: teams and the FIA continue to work closely to refine cost cap interpretations, ensuring a level playing field and financial transparency in a constantly changing technical and regulatory environment.

Is the cap working – and will it stay?

The cost cap has narrowed the financial gap between top and midfield teams and helped limit runaway spending. However, it has also introduced complexity, with increased administrative overhead for the FIA and occasional tensions over interpretation and enforcement.

Amid internal debates, Formula 1 and the FIA are now reviewing whether the structure should continue beyond 2026 in its current form. There’s strong support from smaller teams to retain and even expand the cap, while some top manufacturers have voiced concerns over its rigidity and implementation cost.

One recent change – introduced in 2025 – is an official winter shutdown for F1 teams and power unit suppliers, similar to the long-standing summer break. This aims to reduce costs and improve staff wellbeing during the off-season.