when was ipt introduced?
What is it?
Insurance premium tax (IPT) is a tax on general insurance premiums. It was introduced in 1994 at a single rate of 2.5 per cent. A second higher rate was introduced in April 1997 on travel, household appliances and some motor vehicle insurance. The history of the rates is shown below. Dates vary between years.
What’s the problem with it?
False equivalence to VAT. Most economists agree that taxes should normally treat different economic activities neutrally, to minimize the harm a tax system imposes on an economy. The problem is that insurance premiums are not the equivalent figure to neutrally compare, economically speaking, insurance with other activities. The economic value of a tomato, for example, is found in the whole price of that tomato. All the costs and profit involved relates to bringing the tomato to the retail outlet. But the economic value of insurance does not relate to the whole premium. Much of the price of insurance premiums is merely akin to making deposits into a savings account, with the insurance function there to make sure everyone has enough ‘saved’ for when they need the money. It’s just as irrational to think of insurance premiums as equivalent to normal goods and services in this way as it would be to do so to regular bank accounts.
The problem is that chancellors have done exactly that. Philip Hammond said IPT was ‘half the rate of VAT’ in his 2016 autumn statement, as if to explain the next sentence in his speech: a rise from 10 to 12 per cent. But over half the value of insurance premiums is accounted for by payouts, so the equivalent rate should have been cut, not raised, to make it equivalent to VAT.
The problem is the same with any arbitrary tax on specific items. As well as making holidays, homes and electrical goods more expensive for households to insure, over-taxing insurance means that there will be too little insurance. The increase to 12 per cent in June 2017 exacerbates this problem.
Another problem is that sectors with high payout ratios are disproportionately taxed. The rate of IPT required to be genuinely equivalent to VAT at 20 per cent in property insurance would be around 8 per cent, for example, while in motoring insurance, the equivalent rate would be 3 per cent.
What should be done?
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This table provides current and historical rates of Insurance Premium Tax ( IPT ). Insurance Premium Tax was introduced on 1 October 1994.
Insurance Premium Tax (IPT) is a type of indirect tax levied on general insurance premiums in the United Kingdom.
The UK government introduced the Insurance Premium Tax to raise revenue from the insurance sector, which was viewed as being under-taxed, and not subject to Value Added Tax. The main EU legislation regarding VAT (Council Directive 2006/112/EC) states that insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents, are exempt from VAT.
The Insurance Premium Tax was announced by Kenneth Clarke in the November 1993 budget and introduced with the Finance Act 1994 which received Royal Assent on 3 May 1994. IPT is under the care and management of HM Revenue & Customs.
IPT raised £2.3 billion in the fiscal year 2009/10.
The main law relating to IPT includes:
There are two different insurance premium tax rates:
Insurers providing taxable insurance are required to register and account for IPT, as must intermediaries who sell insurance subject to the higher rate of IPT and charge a separate insurance-related fee on top of the premium itself.
The Chancellor George Osborne stated in the 2016 spring budget that the standard rate of IPT would increase from 9.5% to 10% from 1 October 2016.
In the 2016 autumn statement the new Chancellor Philip Hammond stated that the standard rate would increase from 10% to 12% from 1 June 2017.
From 1 October 1994 to 31 March 1997, a single rate of 2.5% was charged. From 1 April 1997, two rates were charged:
All types of insurance risk located in the UK are taxable unless they are specifically exempted. Exemptions from this tax include:
Businesses are required to register for IPT if they are:
Businesses must be registered from the date they receive (or someone receives on their behalf) their first taxable premium. Businesses must inform HM Revenue & Customs within 30 days of forming the intention of receiving taxable premiums as the insurer.
Insurance Premium Tax (IPT) is a tax on general insurance premiums and applies to types of insurance, such as home insurance, landlord insurance, car insurance, and pet insurance. You can get two different rates of IPT: a standard rate of 12% and a higher rate of 20%, which applies to, electrical appliance insurance, travel insurance and some vehicle insurance. It is paid for by the policyholder but collected and paid to HMRC by the insurer.
In this guide, we look at the background of IPT, how it works, how it is calculated, how it’s increased over the years and the insurances that are exempt from IPT.
IPT was introduced in October 1994 at a single rate of 2.5%.
In January 1973, the UK joined the European Economic Community (EEC), and as a member nation was required to adopt VAT into the taxation system. However, insurance premiums are not subject to VAT; so, in 1994, the Government introduced Insurance Premium Tax.
In 1997, the standard rate of IPT rose to 4%, and a higher rate of 17.5% was also introduced. Over the years IPT rates have fluctuated and at present they stand at 12% (standard rate) and a 20% higher rate (more details below).
The higher rate was brought in line with the VAT rate to discourage the practice of manipulating the combined sale of products and insurance, whereby an exaggerated portion of the sale might be attributed to an insurance policy for the sake of a lower tax rate.
Insurance tax premium creates revenue for the UK Government. When a customer pays their insurance premium, the insurance providers must pass tax to directly to the government. IPT is currently either 12% or 20%.
Insurance tax premium is a compulsory tax that insurance companies or insurance brokers must pay. Historically, IPT is added to customers’ premiums and any increases in IPT will directly affect the price they customer pay.
No, IPT is a one-off tax on a single product. In this respect, IPT has more in common with tobacco duty. VAT, on the other hand, is passed from seller to buyer until it reaches the end user who pays a tax on the cumulative elements of a product or service.
Unlike VAT, Insurance Premium Tax cannot be claimed back.
The tax on an insurance policy is calculated as a percentage of the premium: 12% standard rate or 20% higher rate. No IPT is due on service fees.
For example, an insurer sells a policy for £400 and charges the customer £70 in service fees. The IPT is either 12% or 20% of £400, so the policyholder would pay either £48 (basic rate) or £80 (higher rate).
Policies that are subject to the higher rate of IPT fall into two categories. The first is travel insurance. The second is insurance sold in relation to certain goods, when the insurance and the products are sold by, or through, the same person or entity.
These goods are:
For example, if you buy a car, and you insure it through the person or business who sold you the car, the insurance policy will be subject to the higher IPT rate. However, if you buy your insurance policy from a different company, you’ll be charged the standard rate of IPT.
IPT rate:
When the IPT rate rises, insurers will sometimes lower their prices so that customers aren’t put off by a sudden increase. IPT must still be paid, though. It’s not unusual for insurers to reduce their own income for the sake of retaining customer goodwill. But that’s not always the case, and the increase could well be passed on to the customer.
Not all insurance policies are subject to IPT.
Exemptions include:
Tax on goods and services generate income which is an important element of public funds. Most of these goods and services generate funds through VAT or “sin” taxes (such as tobacco, alcohol, gambling). Insurance is a huge sector that generates billions of pounds a year in IPT for the public purse. Without this tax the UK would be poorer and public services would suffer.
It’s the insurance companies’ responsibility to pay IPT and in most cases the tax is passed on to the customer.
There are ways to reduce your insurance premium, which will bring down the amount of IPT you pay. These include; additional security features for your home, car, or IT equipment or increasing your voluntary excess which would mean a lower premium but potentially a high price to pay in the event of a claim.
