A simples guide

A Guide to Insurance Premium Tax

Insurance Premium Tax (IPT) was introduced in the UK back in 1994 at a standard rate of 2.5%. At the time it was introduced the Government argued, some might say spuriously, that IPT was a tax on the insurer and not on the consumer.

Clearly in practice this has not been the case, insurers have simply passed on the tax to their customers meaning a rise in the cost of insurance for everyone with an insurance policy.

Over the years, successive Chancellors, keen to avoid headline grabbing increases in taxes such as income tax or VAT, have increased the so called ‘stealth’ taxes like IPT instead. In November 2015, the rate was hiked from 6% to 9.5% and in the most recent budget, it was announced that it would increase again to 10% in 2016.

There is also a second rate, a ‘higher rate’ which is in line with VAT at 20%. More on how they apply to your premiums later.

Like all taxes HMRC works hard to ensure that there are no loopholes and unfortunately there is nothing that consumers can do to avoid paying the tax.


Are all policies affected?

For the types of general insurance policy that we care about, yes, all policies are affected.

- Car insurance, home and contents, and pet insurance are charged at the standard rate.
- Travel insurance and certain types of appliance insurance are charged at the higher rate.

Life insurance and mortgage insurance are exempt from IPT. The only other exemptions on the tax benefit the insurers as they apply to certain specialist commercial types of insurance.

car and money

Who does it hurt most?

Governments use two types of tax to raise money. The first type is taxes that hit money we receive, taxes such as income tax, inheritance tax or taxes on savings and dividends for example. The second type hits what the government would call ‘consumption’, to you and us, ‘spending’.

IPT is in this latter group of taxes. It’s fairly crude in how it works, if you spend £100 on your premium, you’ll pay £10 IPT from October. If your premiums go up, your IPT goes up too.

In this way, it is similar to VAT, the more you spend, the more VAT you pay. However, there’s a difference between IPT on car insurance and VAT though.

Aside from the essentials such as electricity, we can choose not to buy items and in doing so, avoid paying so much VAT. In contrast, car insurance is compulsory so the consumer has no way of avoiding the tax.

Who pays the highest car insurance premiums? The young and first time drivers predominantly.

Unfortunately then, where car tax is concerned, this tax falls disproportionately on this group of drivers. You could be a millionaire driving a Rolls Royce and pay less IPT than a student driving a Fiat Punto.

Fair or not fair, it is unfortunately the law.

Is there anything I can do?

To avoid paying IPT, no.

The only thing you can do is shop around actively to find the best car insurance premiums. The market for car insurance is very competitive and insurers often offer lower premiums to new customers than they offer their existing customers. This means at renewal time it is always worth comparing prices. Of course there may be reasons for remaining loyal to an insurer, for example if you have a fantastic claims experience, the time when you needed them most.

If however, you’re shopping on price, you should always compare premiums on your car insurance. We can’t do anything about IPT. In fact we can’t do anything about the premiums themselves. What we can do however, is make comparing the market very simple to do and hopefully save you some money along the way.

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