Insurance Premium Tax IPT Rates In The UK

insurance tax

Although VAT is the most frequent type of tax, it does not apply to insurance; here is where insurance premium tax comes into play. There has been a lot of discussion regarding the Insurance Premium Tax rate, mostly since it continues to rise. It’s easy to dismiss the insurance premium tax, but it’s critical that you understand what it is and how it affects you. Here’s a rundown of what you need to know about the IPT rate in the UK and how it affects you.

What is Insurance Premium Tax?

The Insurance Premium Tax (IPT) is a UK government tax that is levied on most insurance plans, including professional indemnity insurance.

It is not the same as VAT and is currently fixed at 12%. Unfortunately, it cannot be reclaimed. The majority of insurance types are subject to an indirect tax that insurance companies account for and recoup through a levy on each sold policy. It generates roughly £ 6 billion in tax receipts per year.

So, it is charged at two different rates: a basic rate of 12% and a higher rate of 20%. Travel insurance, electrical appliance insurance, and some automobile insurance are subject to a higher rate of insurance premium tax.

You should be aware of IPT because it can increase the cost of your car insurance.

Is Insurance Premium Tax the same thing as VAT?

IPT operates in the same manner as VAT does, in that it is added as a percentage to the overall cost of your insurance premium. So, a £500 automobile insurance premium will cost £560, including the regular rate of 12% IPT.

How is the Insurance Premium Tax Calculated?

The insurance premium tax is a percentage of the underlying insurance premium.

If your insurance premium is high, for example, if you’re a youthful driver or your automobile is a high-priced make or model, your IPT will be greater because the underlying cost of the insurance is higher.

As an example:

If your annual premium is £300, you will pay £336 in IPT at a rate of 12%. Or, at a higher rate of 20%, it will be £360.

If your annual premium is £600, you will pay £672 with the 12% IPT. It will cost £720 after a 20% discount.

How has IPT Evolution Over The Years?

The rate of IPT is established in the Government’s Budget, and it has risen over time, affecting insurance prices. When it was first implemented in 1994, the tax was only 2.4 percent.

Several adjustments have been made to the tax over the last 25 years to ensure that it keeps up with industry innovations, remains fair, and eliminates chances for avoidance and evasion.

The increased rate was implemented in 1997 to combat VAT avoidance, in which businesses selling insurance alongside other commodities might artificially lower the price of that item while inflating the cost of the insurance.

The most recent tax increase occurred in April of 2017. The lower band increased to 12%, whereas the higher band remained at 20%.

Aviva’s Digital Propositions Manager, Nick Gibbs, explains: “We keep an eye on the Budget each year, and when the Government changes the tax, it tends to happen very swiftly.”

What Happens If the Insurance Premium Tax Increases?

When the government raises the tax, insurance companies must pass the increase on to their clients.

What you sometimes see for a short time after a rate increase is insurance firms essentially lowering the cost of premiums so that their consumers don’t experience the increase in tax. However, regardless of the reduction in premiums for the consumer, the insurance company must collect and pay the same percentage of tax to the government.

Why are you Required to Pay Insurance Premium Tax IPT?

IPT brings in money for the government. When clients pay their premium, the insurance provider is required to send the tax—either 12% or 20%—earned on the premium directly to the government.

What Impact will IPT have on you?

Because it is calculated as a proportion of the policyholder’s premium, the standard IPT rate is the same for all policyholders. However, for consumers who are already paying higher costs, the 12% rate works out much higher in monetary terms. As a result, teenage drivers are disproportionately affected.

What Types of Car Insurance are Subject to the Higher Insurance Premium Tax IPT rate of 20% in the UK?

The higher rate is often paid on auto insurance coverage obtained directly from a car dealership, such as when purchasing a brand-new car. As a result, always check before accepting an insurance offer from a dealership (the higher rate does not apply if you are offered free auto insurance as part of a package).

What Types of Insurance are Exempt from IPT?

The Insurance Premium Tax applies to the majority of insurance coverage. However, there are some exceptions:

  • Coverage for disabled drivers who rent from Mobility
  • Mortgage protection insurance
  • Whole life insurance, perpetual health insurance, and any other type of long-term life/health insurance policy (excludes medical insurance)
  • Reinsurance
  • Risks originating outside of the United Kingdom
  • International transportation of commercial commodities
  • Export credit

Is the Insurance Premium Tax Rate in the UK Expensive?

Despite recent dramatic increases, the rate of insurance premium tax IPT in the UK remains lower than in many other European countries, with the current 12 percent rate ranking sixth in the EU region.

Is it conceivable that the Insurance Premium Tax rate in the UK will rise?

The ABI is encouraging the government to cut the rate of Insurance Premium Tax (IPT) on a vehicle or van insurance premium.

According to the report, the rate has more than doubled since 2015. Also, the government earns an estimated £6.3 billion in IPT, which is more than the tax levied on beer, wine, and gaming.

According to the most recent numbers, the average automobile premium paid in 2019 was £471, the third-highest yearly total on record.

In 2019, this includes an insurance premium tax of roughly £50 per policy.

Why am I paying a higher IPT on my new car?

If you buy a new automobile and accept the dealership’s insurance, the tax rate might be as high as 20%.

This is due to the fact that the insurance is considered to be related to the sale of the car. Therefore it is fixed at the same rate as the VAT you pay on the car.

This is intended to prevent tax evasion, in which a dealer may claim that part of the car’s cost was insurance, resulting in less tax than if it was included in the car’s price.

This possibility is eliminated by making IPT equal to VAT in certain circumstances.

It is better to arrange your own insurance before driving the automobile away or to inquire with the dealership about the rate of IPT you would be required to pay if you accept their insurance offer that is related to the sale of the car.

How can I reduce my IPT?

Paying less for your auto insurance and shopping around for a better deal is the easiest method to save money on insurance, decrease IPT tax, and avoid any price increases.

You can save money on auto insurance if you are:

#1. Older and more seasoned

Drivers who are experienced and have a clean driving record might still receive a decent rate on their insurance.

Drivers under the age of 25, both men and women, pay significantly more than drivers over the age of 25. If you are a new driver, you can save money on auto insurance by adding a named driver who is older and more experienced to the policy. However, avoid fronting by adhering to the policy’s terms and conditions.

This occurs when a parent or more experienced driver functions as the primary user of an automobile, despite the fact that the vehicle is driven by the younger person on a frequent basis.

#2. The type of car you drive

The sort of car you drive, as well as its speed, security features, and value, all have a role in determining your insurance premium.

#3. Increase the Voluntary Surplus

As a result, the monthly premium will be lower. Make sure you can afford any optional extra before purchasing auto insurance. This excess is in addition to the mandatory excess imposed by your insurance company. This is the amount you would have to pay if you ever had to file a claim.

#4. Pay in advance

If possible, pay for your insurance all at once. Spreading the cost of your car insurance over 12 monthly instalments may appear to be less expensive, but keep in mind that you will usually be paying interest on top of the amount you pay toward your car insurance premium.

#5. Reduce your driving.

Limiting your mileage reduces your insurance risk. Simply because you are lowering your chances of being in an accident.

When you purchase a car insurance policy, the insurer will always request an estimate of your maximum yearly mileage.

You should aim to keep your mileage low, but you should also be realistic about how much you will drive.

#6. Additional safeguards

Having a car alarm or immobilizer is considered a theft deterrent, and preventing car thieves can help you save money on auto insurance. This is not available from all insurers, so make sure to check first.

#7. Consider purchasing a black box or telematics insurance.

Black box or telematics insurance can help you save money on your auto insurance over time.

In your car, a little device known as a black box is installed.

This then determines how fast you drive, when you stop, what time of day you drive, how quickly you accelerate, and how you manoeuvre through turns.

Some black boxes contain an app that can be accessed via your phone.

You may be rewarded with lower monthly rates if you drive carefully.

#8. When you don’t own a car, you can save money on automobile insurance.

You do not have to own a car to obtain auto insurance. In contrast, to complete auto insurance coverage, you will not accrue a no-claims bonus, but you will be able to drive someone else’s car as long as you get their consent. If you merely intend to borrow a car, you may also compare short-term or temporary car insurance quotes.

If you need to insure many vehicles, look into multi-car insurance policies.

Multi-policy insurance may also be appropriate if:

  • you own more than one vehicle,
  • you’re having more than one driver in your family,
  • you and your partner own more than one vehicle

Insurance Premium Tax FAQ’s

Can you claim back insurance premium tax?

It isn’t, and it can’t be claimed as such. IPT is an additional cost of your insurance that should be added to the insurance cost to offer you a total insurance cost.

Do insurance companies pay taxes?

Insurance firms pay corporation tax solely in the state where they are incorporated, while premium taxes are collected in every state where premiums are written. As a result, insurance companies will pay the higher its domicile’s tax rate or the tax rate in the state where the premium was written.

What does premium tax mean?

A premium tax is a tax that insurers are frequently required to pay on the premiums received from their policyholders. Because the tax varies by state, the actual amount that insurers must pay for premium taxes can vary greatly among locations.

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A premium tax is a tax that insurers are frequently required to pay on the premiums received from their policyholders. Because the tax varies by state, the actual amount that insurers must pay for premium taxes can vary greatly among locations.

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