A simples guide

Will Insurance Premium Tax (IPT) continue to rise?

Let’s start with a confession. While we’re really, really good at comparing the costs of insurance policies, we have yet to get into the business of predicting what will happen to tax rates. Simply, we don’t know whether IPT will continue to rise!

Now, before you close the page, we do know a thing or two about IPT and, if we tell you what’s happened so far, you can probably make your own mind up.


What does history tell us?

Well, the standard rate of IPT was introduced back in 1994 at 2.5%. Since 1994 it has been increased five times:

1st April 1997 - 4%
1st July 1999 - 5%
4th January 2011 -6%
1st November 2015 - 9.5%
From 1st October 2016 - 10%

So, if you’re a believer in history being a good indicator of what happens in the future, you can hazard a guess. If you’re politically minded you should also know that both Labour and Conservative Chancellors have increased the rate.

It’s worth noting that it had been widely ‘leaked’ that IPT was likely to rise to 12.5% in the recent budget. Whether the Chancellor was making us feel better about a tax rise by only moving the rate to 10%, only he will know. Alternatively, perhaps he’s flagging where we might expect IPT to go in the future?

Insurance vs other services

On most goods and services we pay VAT, and the rate of VAT in the UK is currently 20%.

There is already a ‘higher’ rate of IPT that has tracked VAT rates since it was introduced. This 20% higher rate of IPT applies to insurance that is usually sold with goods and services that already attract VAT.

This includes travel insurance which is normally sold with travel. It also includes car insurance sold through a car dealer as an add-on to the car sale itself.

Could we surmise that the intention is to move IPT to the same rate as VAT?

Well there would be uproar if any government was to move so quickly to such a higher rate but you might be interested in what was said when IPT was introduced back in the 1993 budget.

The then Chancellor explained that his task, in terms of tax, was simple: “I need to raise revenue, but to do so in a way which does least damage to the economy.” One way of doing this is to charge an existing tax on new things. He said, “I have never disguised my personal view that the coverage of value added tax in this country is too narrow.”

Insurance was one service that remains VAT free and the Chancellor noted that “we have always tended to tax financial services in this country much more lightly than other sectors, including manufacturing.”

He then introduced IPT. So, right back when it was introduced, a link to VAT was made.

So why not just add VAT?

Perhaps the Government would love to, but right now they can’t. VAT on insurance is expressly forbidden under European law.

However, in a loop hole that you could drive your car through, countries can introduce other taxes on insurance if in the public interest. We’re hardly alone in seeing this done. When IPT was introduced here, insurance was already taxed across most of Europe and in America.


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