Insurance premium tax

Insurance Premium Tax (IPT) is a tax on insurance premiums, similar to VAT in retail. The standard rate is 12% and applies to policies like car, pet and home insurance. A higher rate of 20% applies to travel insurance, electrical appliance insurance and some vehicle insurance.

Insurance premium tax rates

Rates	From 1 June 2017	From 1 October 2016 to 31 May 2017	From 1 November 2015 to 30 September 2016	From 4 January 2011 to 31 October 2015	Up to 3 January 2011
Standard rate	12%	10%	9.5%	6%	5%
Higher rate	20%	20%	20%	20%	17.5%

What is insurance premium tax?

First introduced in 1994, insurance premium tax (IPT) is a tax on general insurance premiums, charged by the providers. This is similar to VAT, which is usually included in the price of goods purchased in stores and online (insurance is not subject to VAT).

When introduced, the standard IPT rate was 2.5%. It has since risen to 12%, which has made more people in recent years sit up and take notice of its existence.

How is insurance premium tax calculated?

The IPT is calculated as a percentage of your premium. This means that the higher your premium cost, the more tax you have to pay.

For example, if your annual tax is £400, you will have to pay £448 on the standard IPT rate of 12% and £480 on the higher rate of 20%.

IPT is actually a tax aimed at insurance companies, but they tend to pass on the extra cost to customers via their premiums.

Is the IPT likely to change in rate?

IPT rates are decided by the government, and so there is no way to know for sure if and when they will go up. However, as the rate has increased several times since IPT was introduced in the early 90s, it is likely to rise again.

The most recent increase, which happened in June 2017, was the third one in less than three years. No further increase has been announced since but, with car insurance being mandatory for all cars on UK roads, this might change in the future.

To combat the rises in IPT, the Association of British Insurers (ABI) has been campaigning for the government to reduce the IPT rate on insurance premiums for cars and vans. According to the ABI, the government collects an estimated £6.3 billion in IPT, which is more than tax collected on beer, wine and gambling.

How much has the IPT rate increased over the years?

Since its introduction, the IPT rate has risen as follows:

• October 1994 – introduced at 2.5%
• April 1997 – 4%
• July 1999 – 5%
• January 2011 – 6%
• November 2015 – 9.5%
• October 2016 – 10%
• June 2017 – 12% (current rate)

How is insurance premium tax different to VAT?

VAT is the most common form of tax in the UK, but it is not applicable to insurance.

IPT was originally launched because the government believed that, as VAT doesn’t apply to insurance, the insurance industry wasn’t paying enough tax.

Like VAT, IPT is included in the price that insurance customers pay for their cover. So, anyone buying a policy will have the IPT included in their quote price, but the provider will then pass the tax over to the HMRC.

An important point to note is that, unlike VAT, IPT cannot be claimed back.

Which type of car insurance does the higher IPT rate apply to?

Standard car and van insurance policies are subject to the standard IPT rate of 12%.

However, the higher rate of 20% applies to some car insurance policies, like insurance for vehicles used for people with disabilities and policies taken out with a car dealership when buying a new car.

The higher IPT rate also applies to travel insurance and mechanical or electrical appliances insurance.

Which insurance is exempt from IPT?

There are several types of insurance that IPT does not currently apply to:

• Life insurance
• Mortgage insurance
• Commercial ships and aircraft
• International railway rolling stock
• Lifeboats and lifeboat equipment
• Goods in international transit

How does IPT impact the cost of car insurance?

Much like VAT can push up the price of goods, IPT can increase insurance premiums, particularly for policies affected by the higher rate.

The government first introduced IPT as a tax on insurers, and it is up to the individual providers to decide whether to pass it on to customers. However, in most cases, IPT is added to customers’ premiums and pushes the price up. Additionally, any increases in the IPT rate directly affect customers’ premiums as well.