Insurance Premium Tax Change – What You Need To Know
In Chancellor George Osborne’s increased the Insurance Premium Tax IPT from its current rate of 6% to 9.5% in his July 2015 budget. This rate increase came into force in November 2015.
Why do you need to know?
The Government introduced the Insurance Premium Tax to raise revenue from the insurance sector, which they reviewed as being under-taxed and not subject to VAT because insurance and reinsurance transactions including related services performed by insurance brokers and insurance agents are exempt from VAT. IPT raised £2.3 billion in 2009/10 recorded by the House of Commons Library.
This new rate will affect policies which range from contents insurance to motor insurance and the Government expects it to generate up to £1.75 billion per year. Travel insurance is already taxed at 20%.
What is Insurance Premium Tax – IPT?
It is a form of tax that must be added to any insurance premium you take up in the UK today. The most common form of tax, called VAT is not applicable on insurance, so the Government have made us pay IPT instead.
There are exemptions to IPT:
- Long term insurance such as Life Insurance and permanent Health Insurance (except Medical Insurance)
- Commercial aircraft, ships and lifeboats and their equipment
- Commercial goods in international transit, non UK risks, international finance, the Channel Tunnel and policies relating to motor vehicles used by disabled persons
Who will be affected?
- All households and businesses will be affected as they will be purchasing insurance which is not exempt from IPT, such as contents, car or private medical insurance.
- All insurers who provide these non exempt insurance cover for the UK market.
This increase is a Government tax, so all insurers and Brokers will be subject to the same new rules and will have to pass on the additional costs to the policyholder.
Most insurers will therefore include the new rate into their premiums so you will pay the correct rate when you pay your premium.
What will you need to do
There is a transition period granted by the HMRC which falls between November 2015 and 29 February 2016. This has been granted to allow insurers time to make the necessary internal process changes.
Provided direct debit agreements are written and agreed prior to November 2015, you had the current 6% rate applied throughout the policy year even if paying monthly, quarterly or bi-annually. If there are any mid-term alterations or additions to these they will be charged at 6% as long as the additional premium is paid before March 2016, otherwise the new rate will apply to them.
All policies with a start or renewal date which is on or after the November are liable at 9.5%
Any premiums set up from March 2016 will have the new rate of 9.5% applied to them regardless.
It will be interesting to see whether this new rate will be the point where people decide not to take out insurance because they think it is too expensive. Adrian Smith, who is the Global Head of IPT at KPMG says, “While it is still a reasonably low rate compared to other countries, it could be enough for a customer to reduce their cover, or opt for no cover at all.”
So, think you are paying too much for your insurance – talk to a financial adviser who can give you pointers and help work out where you could save on your policies.
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