How does Insurance Premium Tax (IPT) affect car insurance?
How does Insurance Premium Tax (IPT) affect car insurance?
The rise in Insurance Premium Tax (IPT) in recent years has led to an increase in car insurance premiums, and it’s often young drivers who are hit hardest in the pocket. Let’s take a look.
What is Insurance Premium Tax?
Insurance Premium Tax (IPT) is a tax on general insurance premiums, including car insurance, home insurance, and pet insurance. There are two rates of IPT: a standard rate of 12% and a higher rate of 20%, which applies to travel insurance, electrical appliance insurance and some vehicle insurance.
When was Insurance Premium Tax introduced?
Insurance Premium Tax was introduced in 1994, with the Government looking for a way to impose greater taxing of the insurance industry, which isn’t subjected to traditional VAT.
A higher rate tax of 17.5% was introduced in 1997, for insurance policies which offered breakdown cover, as well as travel and product insurance. This was later brought in line with VAT, at 20%.
Is IPT the same as VAT?
IPT works in a similar way to VAT as it’s added as a percentage to the total cost of your insurance premium. So, a car insurance premium of £500 will be £560 including the standard rate of 12% IPT.
What car insurance does the higher 20% IPT rate apply to?
The higher rate is sometimes charged on car insurance policies taken out directly with a car dealership, for example, when you buy a brand-new car. For that reason, always check before you take up an offer of insurance from a dealership (the higher rate won’t apply if you’re offered car insurance free as part of a package).
What insurance is exempt from IPT?
Most insurance policies must adhere to Insurance Premium Tax. There are, however, some exceptions:
- Cover for disabled drivers who lease with Mobility
- Mortgage insurance
- Whole of life insurance, permanent health insurance and all other long-term life/health insurance policies (excludes medical insurance)
- Reinsurance
- Risks located outside the UK
- Commercial goods in international transit
- Export finance
How has IPT increased over the years?
In 1994, the introductory standard rate of IPT was just 2.5%. But over the years IPT has increased, to 6% in 2015, then to 9.5% in November 2015, and in October 2016 it rose by 0.5% to 10%. Today’s rate of 12% means that IPT has doubled in only a few years.
How does IPT affect the price of car insurance?
IPT is added as a percentage to the total cost of an insurance premium. It’s an indirect tax which gets levied on insurance providers, but many providers pass these costs on to customers in the form of higher prices.
It’s young drivers who will be the hardest hit as they’re the ones that pay the highest premiums. Our latest young drivers research found that 17-24-year-olds spent an average of £1,264** on their car insurance premium. There are also concerns that rising car insurance costs could lead to more uninsured drivers on the road.
**Compare the Market's Young Drivers research from March 2020.
How can I cut the cost of car insurance?
With the rising cost of repairs, IPT and the VED tax bands introduced on 1 April 2018, it may seem like finding cheap car insurance is an impossible challenge.
While there’s nothing you can do about the rises, there are steps you can take to help cut the cost of car insurance. Take a look at our top tips for cheap car insurance for more information.
And by simply comparing car insurance with us, you could save up to £282*** on your next car insurance premium.
***Based on Online independent research by Consumer Intelligence during February 2020 50% of customers could save up to £282.66 on their car insurance premium.
