Insurance premium tax

The 2016 Autumn Statement announced a further rise in insurance premium tax (IPT), but what is it and how does it affect insurance costs?

In the latest Autumn Statement on 23 November 2016, Chancellor Philip Hammond announced insurance premium tax (IPT) will increase from the current rate of 10% to 12% in June 2017.

What is insurance premium tax?

Insurance premium tax is charged as a percentage of insurance premiums across most general insurance products, including car, home, travel, pet and private medical insurance. Other types of insurance, including life insurance, are exempt from the charge.

IPT was introduced in 1994 to raise revenue from the insurance sector, which was then viewed as being under-taxed. The rate of IPT stood at just 2.5% when it was first introduced.

While IPT charges remained stable until 1997, the rate has increased nearly fivefold since it was introduced, with more dramatic increases being introduced in the last few years.

The treasury has described IPT as a tax on insurers, and pointed out that it is up to insurers whether to pass the costs on to customers. However, in most cases, IPT is added to customers’ premiums and any increases will directly affect the price they pay.

Because insurance premium tax is a flat rate across all policies, people with the highest premiums are most affected by IPT. For car insurance policies this impacts inexperienced drivers, and for home insurance people who live in high-risk areas are likely to pay the most IPT.

Latest rise in IPT

Chancellor of the Exchequer, Philip Hammond, announced a further increase to insurance premium tax in his first (and last) Autumn Statement on 23 November 2016.

The rate will rise to 12% from June 2017, from its current level of 10%.

The current rate was brought into effect in October 2016, after rising from 9.5%. The tax rate previously jumped from 6% to 9.5% in 2015.

The new rate in June will mark the third increase in 18 months, with the rate of IPT doubling in that time period.

Despite the sharp increases in recent years, the rate of IPT in the UK remains lower than in many other European countries. The current 10% rate is the eighth highest in the EU, and June’s increase will take the UK to sixth position.

What does it mean for insurance costs?

Insurance premium tax affects an estimated 25 million car insurance policies and 25 million home insurance policies throughout the UK.

According to the Association of British Insurers (ABI), the tax increases introduced between 2015 and 2017 will add more than £25 a year to the average comprehensive car policy and £19 to combined building and contents cover.

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