Your guide to Insurance Premium Tax

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What exactly is Insurance Premium Tax? Here’s a run-down of everything you need to know and how it affects you.

By Tracey Siggers

What is Insurance Premium Tax?

Insurance Premium Tax (IPT) is a tax on insurers, like VAT, that applies to most general UK insurance premiums 1 or potential premiums. After your insurance provider collects the premium from you, the tax is paid directly to the Government. 

Currently, there are two rates of IPT. The first is a standard 12% is charged on home, car or pet insurance.

The second is a higher rate of 20% which now generally applies to other types of insurance sold by suppliers of some cars, for example, if you buy a new car direct from a dealership. It also applies to domestic appliances, and travel insurance 1

How is IPT calculated?

The Government sets IPT which is calculated as a percentage of your premium, meaning the higher your premium cost, the greater the tax.

For example:

If your annual premium is £300, with 12% IPT, it will be £336. Or at the higher rate of 20%, it will be £360.

If your annual premium is £600, with the 12% IPT, this will be £672. At 20%, it will be £720.

How has IPT increased over the years?

IPT levels are set in the Government’s Budget, and the rate has increased over time, impacting insurance premiums. When introduced in 1994, the tax was just 2.4% 1

Over the past 25 years, several changes have been made to the tax to ensure it keeps up with industry developments, remains fair and removes opportunities for avoidance and evasion 1.

The higher rate came into effect in 1997 to address VAT avoidance, where businesses selling insurance with other goods could artificially reduce the price of that item and inflate the cost of the insurance 1

The last tax increase was in April 2017. The lower rate rose to 12%, but the higher band stayed at 20%. 

Nick Gibbs, Aviva’s Digital Propositions Manager, explains: “We keep an eye on the Budget each year, and when the tax is changed by the Government, it tends to happen relatively quickly.”

What happens when IPT rises?

When the Government increases the tax, insurance providers must pass this on to their customers. 

Nick explains: “What you sometimes see for a short time after a rate rise is insurance companies effectively reducing the cost of the premiums so that their customers don’t feel the increase in the tax. But, regardless of this reduction in premiums for the customer, the same percentage of tax has to be collected and paid to the Government by the insurance provider.”

Why do you need to pay IPT?

IPT generates revenue for the Government. When customers pay their premium, the insurance provider must pass the tax – either 12% or 20% – collected on the premium directly to the Government. 

Are there any exemptions?

Some types of insurance are exempt from IPT, for instance, life insurance, permanent health insurance, commercial aircraft and ship insurance, and risks located outside the UK. Visit HMRC for a comprehensive list.

How can I reduce the amount of IPT I have to pay?

If you want to reduce the amount of tax you pay, you should look at ways to reduce your insurance premium. This could include:

• Fitting extra security features to your house or car.

• Increasing your voluntary excess – but remember that you’ll be liable for the extra cost if you do need to make a claim.

• Paying your premium upfront in one go (rather than in monthly instalments) as this can reduce the overall amount you pay during the year.