No sooner had we gotten used to the increased Insurance Premium Tax (IPT) rate of 9.5% effective early 2016, up from the 6% introduced in 2011, do we find that it’s going up again, a result of the last Osborne Spring budget – before some commentators start bemoaning the effect of Brexit!
Why does IPT exist?
Insurance is exempt from VAT – the most common form of tax which of course, applies to most purchases. However, IPT was introduced in 1994 at a rate of 2.5% presumably to compensate the Treasury for the perceived loss of income as a result of the exemption. A stealth tax many called it at the time because it hit those who were doing the sensible thing and spending money on protecting their assets. This latest round of increases was heavily criticized by the industry especially around the work being done to encourage adequate insurance especially surrounding the areas of Flood and young drivers
The new rate of 10% will be introduced on the 1st October 2016 for new business and renewals, and by February 2017 it will be applied to all qualifying policies including mid-year alterations, regardless of when the contract was arranged.
The UK’s rate of IPT is however much lower than the 19% in other European countries, however we still have the fourth most costly car insurance premiums in the world after the US, Austria and Germany
Why is it being increased?
The extra funds generated by this latest increase are to be ring-fenced for flood defences and resilience strategies. Last year’s increase was anticipated to generate an extra £1.5 Bn, while the extra 0.5% due in October should further boost this figure by £700m.
What impact will it have?
IPT will be applied to personal and business policies including property, liability and motor insurance. It’s anticipated that the increase of 0.5% will equate roughly to an extra £2 on both personal and commercial motor insurance and £1 on property covers.. This is less of a hike than that of last November, which it is estimated when the tax amounts increased by over 50%
Travel insurance remains unaffected, as a new higher level of IPT was introduced a few years ago although this has since increased to 20%.
Because the tax is a percentage of the premium, location and circumstances of the policyholder could have a significant impact on how much they would have to pay in IPT.
The issue for businesses of course – especially those that are vat registered and can reclaim qualifying vat expenditures – is that IPT cannot be reclaimed although it is a legitimate business expense.
In real terms, well managed businesses in particular are seeing little if any premium increase charged by insurers and generally speaking, increases in 2016 over 2015 are often solely the result of the increase in tax. A thorough review of a business insurance programme can often result in real savings and wider cover.
If you would like to know more about how IPT might affect you specifically, please contact us.