A simples guide

How is insurance premium tax calculated?

Insurance Premium Tax (IPT) was introduced in the UK over 20 years ago. Back then it was applied at a standard rate of 2.5%.

When it was introduced the Government argued that IPT was a tax on the insurer and not on the consumer. However, in practice this hasn’t really been the case. Insurers have simply passed on the tax to their customers. This means that car insurance premiums have been directly impacted by the tax.

Over the years, Chancellors have upped the standard rate, where
it now stands at 9.5% having been hiked from 6% in November 2015. In the most recent budget, it was announced that it would increase again to 10% in October 2016.

Along with the standard rate, there is also a second rate, a ‘higher rate’ which charged at the same rate as VAT at 20%.


So how is it calculated?

First of all, you won’t have to calculate the IPT. The insurance company will do it and it will be included in the premium you’re quoted.

If you’re interested, for your car insurance the process of calculating the tax is quite straightforward. It’s a tax that is charged at a flat rate.

So, if your premium before IPT was £100, the IPT would be £9.50 and you’ll pay £109.50 premium. From October this will become £10 IPT so £110 overall.

This is the same rate and the same principle that applies to other forms of cover including buildings insurance and contents insurance.

You’re most likely to come across the higher rate (20%) when you’re buying travel insurance, as the higher rate applies here. The only time you would suffer IPT charged at the higher rate in connection with cars, is if you took out a policy through a motor dealer. This might happen if you bought it when purchasing a new car. Insurance sold as an ‘add on’ in this way is chargeable at the higher rate.

As with standard car insurance, it would be included in the price quoted to you by the dealer.

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