What is IPT?

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Insurance Premium Tax (IPT) is a tax on general insurance premiums, introduced by Kenneth Clarke in the 1993 Budget.

Since its introduction, IPT has become a contentious topic as the standard rate was originally set at 2% but it has increased steadily and incrementally year on year. In June 2017, IPT reached a high of 12%. The Social Market Foundation found that IPT currently makes £4.8bn each year for the UK government – the equivalent of £179 per household across the UK.

Who pays IPT and who is exempt?

IPT captures a wide net of insurance policies – from household insurance and car insurance to pet, mobile phone, landlord insurance and business policies.

There are two rates of Insurance Premium Tax:

  • The standard rate of 12%
  • The higher rate of 20% – applicable to travel insurance, some vehicle insurance and electrical appliance insurance

Exemptions from IPT include:

  • Re-insurance
  • Premiums for risks located outside the UK
  • Most long-term insurance policies
  • Insurance for commercial goods in international transit
  • Insurance for commercial ships and aircraft

Is IPT a regressive tax?

The standard rate of IPT is the same for all policyholders as the set percentage of the premium they are paying. However, 12% is obviously a larger percentage for those paying higher insurance premiums.

IPT often takes a larger percentage from those with less money to spend. For example, young drivers are often less financially well off than older, more experienced, drivers but as they are considered to be a higher risk, they have to pay high car insurance premiums.

Those who live in flood risk areas are also considerably affected by IPT, due to the increased chance of the homeowner making a claim on their policy.

IPT is a tax on consumers rather than insurers – the cost is simply passed on to the policy holder.

The high cost of IPT can also impact charities which need business insurance.

What will happen in the future?

After Brexit, the government will have the freedom to move the taxation of insurance through VAT for convenience. This would then potentially increase IPT to 20% to match VAT, but would also be a much more flexible system. Some businesses could potentially claim back some costs.

It helps to remember that the current standard 12% rate is actually quite moderate compared to other countries – for example Finland has a 24% standard rate of IPT.

Ways to make IPT more affordable

Insurance Premium Tax is unavoidable and it is essential you have the correct level of insurance cover for your individual needs. If you are finding your insurance costs are too high, make sure that you compare the cost of your policy, seeking advice from a regulated insurance broker.

Our experienced team of brokers will often be able to offer you a lower price on your insurance premium, saving on average 27% on your existing policy.To see how we can help you reduce the cost of your insurance premium, please just get in touch and we’ll be happy to help you.