The Raised Rate of Insurance Premium Tax
27 March 2017
Insurance Premium Tax (IPT) is set to rise to 12% from June 2017. The tax is added to 50 million insurance policies every year including cover for homes, cars and private health policies.
All insurers who provide non-exempt insurance cover, as well as the brokers and agents who act for them will be affected by the increase. Households and businesses who purchase non-exempt cover will also be affected, should the insurer choose to pass on the rate rise to its customers.
Exemptions from IPT include reinsurance, insurance for commercial ships and aircraft, insurance for commercial goods in international transit and premiums for risks located outside the UK.
Life insurance, permanent health insurance and all other long-term insurances are also exempt. Travel insurance and mechanical breakdown policies are already charged at a rate of 20% IPT, but this remained unchanged in the autumn statement.
This increase will have seen the rate double over the course of eighteen months. However, the Chancellor Phillip Hammond assured those who were worried about the alarming increase that Britain’s IPT rates are still amongst the lowest in Europe.
It is not expected to have an administrative impact on businesses purchasing insurance which is not exempt from IPT. Nevertheless, the cost of purchasing insurance may rise, if insurers choose to pass on the IPT rate rise.
There are almost one thousand insurers in the UK who will incur one-off costs in updating their systems to apply the new tax rate but the government insists there will be no further ongoing financial burdens.
This latest increase is challenging as it will hit both consumers and businesses alike. Insurance brokers are faced with a choice: Either take the financial hit or pass the costs on to their customers.
When IPT was first introduced in 1994, it was at a rate of 2.5%. It was initially introduced to generate revenue from the insurance sector, which was widely viewed as under-taxed. Through successive chancellors, it has increased by almost 10%. It has been increased three times in the past eighteen months. The last hike took place in just October last year.
Car drivers are likely to emerge the worst off. The increase will see an average of £10 per year added to the average insurance premium. Car insurance is already the subject of much grievance owing to its steady increase – the average premium is now up 16% to £586.
Insurers are now looking to pass on this cost to their customers. From June, most buyers will see the higher 12% rate added to their premiums – prompting fears that individuals may be put in the position of being unable to afford their specific cover.
The government measure will cost UK households an additional £680 million this year, rising to £855 million in the tax year for 2021 - 22.
Given the recent rate of increase to IPT, it seems most likely that there will be further increases with the Autumn statement. It is a straightforward way for the Treasury to guarantee funds – especially since insurance policies are compulsory. There are fears that the Chancellor will soon seek to bring IPT in line with the rate of VAT.
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Written By Stuart McKenna