Insurance premium tax (IPT) is a tax the UK Government applies to certain insurance products.
In this post we will explain how IPT works, including the types of insurance policies to which it applies.
What is Insurance Premium Tax?
The UK Government applies IPT to general insurance premiums. Rather than seeing IPT as a separate payment, it is built directly into the premiums you pay for certain forms of cover. Your insurer collects the tax in this way before passing it on to HMRC.
Insurance Premium Tax vs. VAT
Perhaps the best way to think of IPT is as a form of VAT that specifically applies to certain insurance products. When you buy applicable products or services, you will automatically pay the VAT as part of the overall cost. Similarly, when you pay your insurance premium, some of the payment will cover your insurance costs, while the rest will go to the UK Government as tax.
But while both VAT and IPT are indirect taxes collected by HMRC, there are some key differences between the two:
- Insurance products are actually exempt from VAT. The Government first introduced IPT in order to collect taxes on transactions to which VAT did not apply.
- The current VAT rate is 20%, which HMRC applies to most goods and services. But there are two IPT rates – a standard rate, and a higher rate.
- While businesses can reclaim VAT on their tax returns, they generally cannot reclaim IPT.
Insurance Premium Tax Rates
HMRC applies two different IPT rates. At the time of writing, they are:
- Standard Rate – 12%
- Higher Rate – 20%
The standard rate applies to some of the most common insurance products, such as home insurance, pet insurance, and car insurance.
Meanwhile, the higher rate generally applies to insurance products that are sold alongside other products or services – such as when airlines sell travel insurance alongside a flight, or when an electronics manufacturer allows customers to purchase cover for their appliances.
You can read a full breakdown of the current IPT rates.
Insurance Premium Tax Exemptions
Certain insurance products are exempt from IPT, including:
- Cover for commercial aircraft and marine vessels.
- Cover for commercial goods during international transit.
- Most long-term insurance products, including life insurance and permanent health insurance policies.
- Reinsurance (i.e. cover that insurance firms take out to cover risks relating to the policies they underwrite).
- Cover for overseas risks – though these policies may instead be liable for taxes imposed by other countries.
You can read a full guide to IPT exemptions.
Who Pays Insurance Premium Tax?
Insurers apply IPT directly to their premiums, which means that they effectively collect the tax payments from their customers on behalf of HMRC. IPT is always paid directly by the policyholder, whether this is an individual or a business.
Can You Claim Back Insurance Premium Tax?
While businesses can claim back VAT, they generally cannot claim back IPT.
Even if your business is VAT-registered, you cannot list IPT as input tax on your VAT return. It is instead treated as an entirely separate tax.
As we mentioned above, certain insurance products are exempt from IPT, and you may be able to reclaim payments if you believe you were charged incorrectly. But this is a matter you will have to settle directly with your insurer. You will not be able to reclaim the payments from HMRC.
How Does Insurance Premium Tax Affect the Cost of Insurance?
The current IPT rates have been in place since 2017, and the rates have risen six times since the tax was first introduced in 1994. If the rate changes at all in the coming years, it will most likely be in the form of a further increase.
IPT means higher insurance premiums for policyholders. Depending on the type of insurance, you will either have to pay 12% or 20%, which will be applied directly to your premiums. This means there is simply no way to avoid it and, as we have seen, businesses cannot reclaim IPT either.
But if you do want to make savings on the cost of your business insurance, a good place to start is through working with an insurance broker. An experienced broker can advise you on key risk management procedures, and show you how to evidence these measures to your insurer in order to potentially save on premiums. Your broker can also help you access a tailored insurance package that will provide insurance solutions for the risks you face.
Get The Right Cover For Your Business
James Hallam is an independent Lloyd’s broker with a dedicated team of insurance professionals who care about protecting your business. As well as offering cost-effective risk management advice, we can also help you source the cover you need for your business.
Learn more about our specialist SME insurance services.