There’s been a lot of talk about Insurance Premium Tax over the past year, and that’s mostly because it’s been on the rise.
In 2015 the Insurance Premium Tax (IPT) was increased from 6% to 9.5%.
Then, on the 16 March 2016, George Osborne announced that, as of the 1 October 2016, the IPT rate will increase again by half a percentage point, to 10%.
It’s easy to push Insurance Premium Tax to the back of your mind, but it’s important you know what it is and how it will affect you.
First things first…what is Insurance Premium Tax?
Although VAT is the most common form of tax, it’s not applicable on insurance — that’s where IPT comes in…
There are two rates of IPT:
- A current standard rate of 9.5%
- A higher rate of 20% - for travel insurance, mechanical/electrical appliances insurance and some vehicle insurance – including things like motor vehicles used for disabled people and even spacecraft! Car and van insurance falls under the standard rate.
IPT must be added to your insurance quote, and most vehicle quotations include the correct rate of IPT in the price. So, if you’re quoted £180, then that’s the price you pay including IPT.
IPT is going up...
Sorry to be the bearer of bad news, but it’s true.
The standard rate, which increased from 6% to 9.5% last November, is increasing to 10% from 1 October 2016. It will apply to pet, motor, mobile, contents, buildings and private medical insurance.
The standard rate, which increased from 6% to 9.5% last November, is increasing to 10%
Will the rise in IPT affect you?
If you have pet, motor, mobile, contents, buildings or private medical insurance, then there’s a good chance you’ll see an increase on these premiums.
The rate of the standard IPT is the same for all policyholders, as it’s a percentage of your premium. However, the new 10% rate works out significantly higher, in monetary terms, for people that are already paying higher prices. This means young drivers will be hit the hardest.
Market research firm Consumer Intelligence estimates the new rise in standard IPT will add £20 to the average motor insurance premium, increasing to an additional £50 for those under 25.
How does the UK compare in IPT rates?
The new standard 10% rate is still lower than many other EU member states which have a standard IPT rate of 19%.
However, this doesn’t take into account that insurance prices in the UK are higher compared to other European countries. In fact, the UK has the fourth most expensive average car insurance premiums in the world (behind the US, Austria and Germany).
When Chancellor George Osborne raised the IPT to the 9.5% rate last year, he said it would create £1.5 billion in extra income for the government. The new 10% standard rate is expected to raise £700 million in order to help fund flood defences.
There’s no denying that the new 10% IPT is going to annoy many people, but it’s also unavoidable. So, whatever you do, don’t be tempted to drive without insurance.
When the IPT was increased to 9.5% last year, Consumer Intelligence polled 1,057 adults, aged 18 and over, asking if they’d consider switching providers as a result. Fifty six per cent of insurance customers said they would consider switching providers, 27% said they would cancel or reduce their cover, and 16% said the rise in IPT will affect all insurers, so there’s “little point in moving”.
The new 10% standard rate is expected to raise £700 million in order to help fund flood defences
In recent years, the insurance industry and the government have been working together to reduce the number of uninsured drivers on the road, so the 27% of people who said they’d cancel or reduce their cover, is a deeply worrying statistic.
If you’re caught behind the wheel of a car that you’re not insured to drive, the police can give you a fixed penalty of £300 and six penalty points. And, if the case goes to court, you may also get an unlimited fine and be disqualified from driving.
Plus, the police also have the power to seize and destroy the vehicle that’s being driven uninsured.
So, although the new 10% standard rate may get your back up a bit, there’s a much higher price to pay if you choose to drive uninsured.