What is Insurance Premium Tax?
Insurance Premium Tax (IPT) is a government levy on insurance premiums. It is paid for by the policy holder but collected and paid to HMRC by the insurer. In this guide, we look at the background of IPT and how it works.
- When was IPT introduced?
- How is IPT calculated?
- How has IPT increased over the years?
- What insurance is exempt from IPT?
IPT was introduced in October 1994 at a single rate of 2.5%.
In January 1973, the UK joined the European Economic Community (EEC), and as a member nation was required to adopt VAT into the taxation system. However, insurance premiums are not subject to VAT; so, in 1994, the Government introduced Insurance Premium Tax.
In 1997, the standard rate of IPT rose to 4%, and a higher rate of 17.5% was also introduced. Over the years IPT rates have fluctuated and at present they stand at 12% (standard rate) and a 20% higher rate (more details below).
The higher rate was brought in line with the VAT rate to discourage the practice of manipulating the combined sale of products and insurance, whereby an exaggerated portion of the sale might be attributed to an insurance policy for the sake of a lower tax rate.
Is IPT the same as VAT?
No, IPT is a one-off tax on a single product. In this respect, IPT has more in common with tobacco duty. VAT, on the other hand, is passed from seller to buyer until it reaches the end user who pays a tax on the cumulative elements of a product or service.
Can IPT be claimed back?
Unlike VAT, Insurance Premium Tax cannot be claimed back.
The tax on an insurance policy is calculated as a percentage of the premium: 12% standard rate or 20% higher rate. No IPT is due on service fees.
For example, an insurer sells a policy for £400 and charges the customer £70 in service fees. The IPT is either 12% or 20% of £400, so the policyholder would pay either £48 (basic rate) or £80 (higher rate).
Policies that are subject to the higher rate of IPT fall into two categories. The first is travel insurance. The second is insurance sold in relation to certain goods, when the insurance and the products are sold by, or through, the same person or entity.
These goods are:
- Domestic appliances.
- Cars, vans, and motorcycles.
For example, if you buy a car, and you insure it through the person or business who sold you the car, the insurance policy will be subject to the higher IPT rate. However, if you buy your insurance policy from a different company, you’ll be charged the standard rate of IPT.
- October 1994: 2.5%
- April 1997: 4.0% (standard rate); 17.5% (higher rate)
- July 1999: 5.0% (standard rate); 17.5% (higher rate)
- January 2011: 6.0% (standard rate); 20.0% (higher rate)
- November 2015: 9.5% (standard rate); 20.0% (higher rate)
- October 2016: 10% (standard rate); 20.0% (higher rate)
- June 2017 (to present): 12% (standard rate); 20.0% (higher rate)
What happens when IPT rises?
When the IPT rate rises, insurers will sometimes lower their prices so that customers aren’t put off by a sudden increase. IPT must still be paid, though. It’s not unusual for insurers to reduce their own income for the sake of retaining customer goodwill. But that’s not always the case, and the increase could well be passed on to the customer.
Not all insurance policies are subject to IPT.
- Life insurance.
- Permanent health insurance.
- Mortgage insurance.
- Risks located outside the UK.
- Commercial goods in international transit insurance.
- Disabled drivers who lease with the Motability
Why do you need to pay IPT?
Tax on goods and services generate income which is an important element of public funds. Most of these goods and services generate funds through VAT or “sin” taxes (such as tobacco, alcohol, gambling). Insurance is a huge sector that generates billions of pounds a year in IPT for the public purse. Without this tax the UK would be poorer and public services would suffer.
Who pays IPT?
It’s the insurance companies’ responsibility to pay IPT and in most cases the tax is passed on to the customer.
There are ways to reduce your insurance premium, which will bring down the amount of IPT you pay. These include; additional security features for your home, car, or IT equipment or increasing your voluntary excess which would mean a lower premium but potentially a high price to pay in the event of a claim.
Paying a premium in monthly instalments is usually a more expensive option than paying it all in one go. So if you can pay your premium annually the overall price will be lower and so will the IPT.
Contact Alan Boswell Group
To talk to us about insurance needs, please don’t hesitate to call our team of experts on 01603 967955.