Insurance Premium Tax Hike Effective 1st Oct 2016

By mjackson

On 16th March 2016, the government announced that the Insurance Premium Tax (IPT) will be subject to another hike. Yet, it will only increase by 0.5% and all the revenue generated from it will fund national flood defences and resilience.

This hike comes just after a previous 3.5 % increase on 1st November 2015—resulting in a tax increase of 66.6% since then. While this hike is considerably smaller than the previous one, you should nevertheless familiarise yourself with the rise and its potential repercussions.

Understanding the Tax Hike

The standard IPT will be increased by 0.5%—raising it from 9.5% to 10%—and will apply to insurance premiums starting on 1st October 2016. The government estimates that the hike will generate an extra £80 million in its first year and then an annual average of £205 million in subsequent years.

This annual revenue boost will come from all households and businesses that pay IPT on their insurance. However, there are several policies that are exempt from the IPT, including the following.

  • Life insurance
  • Insurance for commercial ships and aircraft
  • Insurance for commercial goods in international transit
  • Premiums for risks located outside the United Kingdom
  • Export finance

Potential Repercussions

Despite the rise in costs, the government is confident that there will only be negligible impacts to the public and private sectors. These include one-off costs for insurers to update their systems to include the new tax rate.

The government estimates that the average combined home and contents policy will increase by £1, and the common motor policy will increase by £2 per year. But this is in addition to the extra £100 added to the average household’s insurance bill from the last increase, according to the Association of British Insurers (ABI).

The ABI has also estimated that the 0.5% increase could cost UK businesses as much as £75 million. Those losses, coupled with consumers’ potentially lower spending power due to higher insurance bills, could further squeeze businesses’ profit margins. In response to this squeeze, the Automobile Association (AA) is cautioning against businesses and motorists forgoing cover to save money, given that a 2015 AA poll found that 87% of motorists believed that the IPT was unfair and that increases will encourage some drivers to attempt to drive without insurance.

However, the government believes that the IPT hike will benefit the UK economy, arguing that it brings the United Kingdom’s IPT in line with other countries. At 10%, the United Kingdom has one of the lowest IPT rates in Europe—still much lower than Germany’s 19% IPT and Italy’s 21.25% IPT. With competitive rates and a robust, diversified insurance industry, the government hopes to continue attracting new international business due to its relatively small IPT.

What Happens Now?

MFL Professional is committed to providing you with the most robust, cost-effective cover and will do everything in our power to ensure that the IPT increase has the smallest possible impact on your policy.