As a small business or individual who buys insurance it is important to understand how your premiums are made up. One factor that is applied to the majority of insurance premiums is insurance premium tax. Here we look at what is insurance premium tax and how it can affect you.
What is Insurance Premium tax (IPT)?
Insurance premium tax (IPT) is a tax introduced by the government in the 1990’s and applied to all general insurance policies which every insurance provider has to charge. It applies to insurance policies such as motor, household, business and landlord.
VAT is not applicable to insurance policies – IPT is charged instead.
What are the rates of Insurance premium tax?
There are two different rates of IPT. A standard rate which applies to many insurance policy types and a higher rate which applies in fewer circumstances:
- A standard rate – this currently sits at 12%
- A higher rate – this stands at 20% at time of writing and is applied to travel insurance, mechanical or electrical appliances insurance and some vehicle insurance
The standard IPT rate has seen many rises over the years since it was introduced but has remained frozen at 12% since 2017.
How do you pay insurance premiums tax?
Insurance premium tax is applied automatically to your insurance premium by your insurer. It is a set % amount (either 12% or 20%) of your premium cost. The cost of the insurance policy that you see will include IPT (if it is applicable).
Once collected by your insurer they will then pay it on to the government. In much the same way as is done with VAT.
Are there any exemptions from Insurance Premium Tax?
There are some exemptions that apply to insurance premium tax which according to gov.uk include:
- Most long-term insurance
- Insurance for commercial ships and aircraft
- Insurance for commercial goods in international transit
- Premiums for risks located outside the UK – these may be liable to similar taxes imposed by other countries
For full details of the exemptions that apply it is best to refer to the gov.uk website.
Insurance premium tax generates revenue for the government and the rate is set by them, not an insurer. Insurers are obliged to charge IPT and it will be automatically applied to your premium’s price if it is applicable. The lower your insurance premium the less IPT you will pay and vice versa. As a business therefore you may want to look at your risk management strategies and work with an insurance broker such as Anthony Joneswhen arranging your small business insurance in order to get the best cover at the best value premium.