How does insurance premium tax affect me?

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Taxes – nobody much likes them but we all have to pay them. And as far as the government is concerned there are two ways of taxing people – on the stuff we earn or inherit and on the stuff we buy. We all know about the obvious ones like income tax, inheritance tax and VAT – but there’s also something called insurance premium tax (IPT) – so let’s find out how this affects us.

What is IPT?

Insurance premium tax was introduced way back in 1994 as a standard 2.5% on most insurance policies. But over the years, IPT has increased, first to 6% in 2015, then to 10% and in the last Autumn Statement it was announced that a further 2% would be added on, which comes into effect on the 1 June 2017 bringing it up to 12%.

Of course, when it was first introduced it was hailed by the government as a tax on the insurance provider but naturally they simply passed it on to us, the consumer. So the government still get their taxes – stealthy. But it doesn’t end there – some insurance policies have a ‘higher rate’ IPT which is 20%, but more on that later.

How is it calculated?

IPT is simply a percentage of your total insurance premium and it’s automatically added onto the cost of your policy. So, let’s say your car insurance was £500 before IPT, at the current rate of 10%, your total premium would be £550. When the additional 2% gets added on in June, you’d pay £560 instead. 

Who does it affect the most?

Well, let’s be honest, seeing as it’s a tax on insurance policies, it affects those of us who like to be responsible and do the sensible things in life – like insuring your car, home or pet. And as you need car insurance to stay legal on the roads, it affects all drivers and in particular young and newly qualified drivers (because you’re the ones that pay the highest premiums). Our last young drivers report found that 17-24 year olds spent an average of £1,257 on their insurance premium; which could be even higher once the increase in IPT comes in.

Are all policies affected by IPT? 

There aren’t many loopholes or exemptions, but there are some; there are also some instances where you’ll end up paying the higher rate of IPT that we touched on earlier – so here’s what you need to know:

What can I do about it?

Like with most taxes – sadly not a lot, unless you want to live off-grid in a tent, ride a bicycle and forage for your food. But there is one thing you can make sure you do and that’s to comparethemarket.com because although you can’t escape IPT, you can search for a great deal in the first place, and where your car insurance is concerned – there are lots of deals to be had – you just need to know where to look.

And when you comparethemarket.com you can be sure of getting not just choice, but great value for your money too, because we’ll show you exactly who gives what for that price. So if you don’t whizz around in your IPT exempt spaceship and have to settle for travelling on four wheels, then do yourself a favour and start comparing.

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