ProtectionMay 20 2016

IPT: Do believe the hike

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IPT: Do believe the hike

While Isas, pensions and capital gains tax (CGT) experienced fundamental attention-grabbing changes as a result the last budget, insurance premium tax (IPT) appeared to escape the headlines. IPT is certainly one of the lesser known taxes - the majority of people have some understanding of the tax burdens attached to income, capital, assets and goods and services, but many are unaware of taxation on insurance premiums.

While Isas, pensions and capital gains tax (CGT) experienced fundamental attention-grabbing changes as a result of the last Budget, changes to insurance premium tax (IPT) appeared to escape the headlines. IPT is certainly one of the lesser-known taxes: most people have some understanding of the tax burdens attached to income, capital, assets and goods and services, but many are unaware of taxation on insurance premiums.

To complicate matters further, not all forms of insurance are considered. Insurance for assets such as houses and cars are included, but life assurance and critical illness are exempt. However, private medical insurance (PMI) and health cash plans are liable for IPT and are therefore hit by these latest announcements.

Much like value-added tax (VAT), IPT is paid indirectly – hidden in the annual or monthly insurance premium. But unlike the situation regarding VAT, much of the population are unaware of its existence and its potential impact on insurance premiums – an impact that reduces consumers’ disposable income.

History

IPT was introduced in 1994 having been announced by Kenneth Clarke, the chancellor at the time, in the previous year’s Budget. Initially set at 2.5 per cent, it was increased to 4 per cent in 1997 and then to 5 per cent in 1999. This level remained until 2011 when it was increased to 6 per cent. However, in response to growing concerns about the country’s ability to cope with winter floods, IPT rocketed to 9.5 per cent from November 2015. A further 0.5 percentage point rise, taking IPT to 10 per cent, will apply to policies taken out on or after the 1 October 2016.

“The subscriber base for private medical insurance has been steadily eroding over the past few years due to spiralling costs, and the IPT increases have only exacerbated the problem,” says Brian Walters, principal at Regency Health, who adds, “The government urgently needs to look at exempting medical insurance from IPT as a key component of alleviating the pressures on the NHS. The government’s own website erroneously describes IPT as ‘a tax on insurers’ when it is, of course, a tax on consumers and businesses.”

Philip Wood, sales and marketing director at Health Shield, says most consumers fail to realise which products attract IPT, adding that his organisation is having to plan for the impact of these changes over the short and long term. “The board made the decision to absorb the hit and not pass it on immediately to our members,” he says. “But ultimately, we will have to review our pricing premiums or benefits because in the fullness of time, you can not carry a 10 per cent strain.”

However, some feel that the impact of the latest rise is only minimal, and that various factors affecting PMI premiums are more significant. “I think it will have a minor impact,” says Emma Wilson, employee benefits consultant at Drewberry. “At every renewal you are going to have age-band increases which can be anything between 5 and 10 per cent. If the scheme has had particularly poor performance with claims, you’ve got the insurers who will then work out a loss ratio.”

NHS strain

Health cash plans enable the consumer to claim on everyday needs such as dental bills and eye tests, coupled with cover for the unexpected within annual limits. So, unlike the case with PMI, you don’t need to be ill to claim. Many consumers use PMI and health cash plans to seek quicker routes to treatment than are available through the NHS, and new figures suggest there is good reason for doing so. The latest monthly performance statistics released by NHS England in May show demand is rising. In March this year, 2,088,674 people visited A&E, a rise of 7.5 per cent from the same month in 2015 and the highest number in any single month since data became available in August 2010. And delayed transfers of care – where patients are ready to return home or transfer to another form of care but still occupy a hospital bed – reached a record high of 169,928 days, up from 140,390 in March of last year.

“Obviously we all sympathise with people who struggled with the floods, but from a mutual point of view we think we’re trying to help synergies with the NHS,” says Mr Wood, who adds that, given the recent troubles, private healthcare should be encouraged rather than being saddled with an increase in tax. “Where there is talk about not putting a strain on the NHS, we feel cash plans are an important point where people have self-paid or self-provided to reduce that strain. So actually introducing a tax on those premiums doesn’t recognise that the NHS is struggling to cope with the volumes of demand.”

Charlie MacEwan, corporate communications director at WPA, says organisations offering PMI may need to pay closer attention to what customers need. “Insurers need to be thinking how they mitigate an IPT rise, and therefore how they bring down premiums. It’s just making sure you’ve got the insurance cover you want.”

He adds that consumers may find it helpful to assess local NHS services when considering a requirement for PMI. “If you agree that medical insurance complements what the NHS does, then if the NHS is phenomenal in your local area, why have medical insurance? You should think about complementing what is done locally.”

Employer benefit

As the importance of employee welfare increases, employers of all shapes and sizes are considering PMI. Although considered to be a benefit in kind, and therefore subject to national insurance at 13.8 per cent, the total annual premium plus this liability can be used as a capital expense against corporation tax. Ms Wilson explains that, although larger organisations are more adept at absorbing the cost of this employee benefit, many small and medium-sized enterprises are starting to follow suit because reducing absenteeism is vital. She says, “A lot of people look at it as a luxury product, but with companies it’s in their best interest to have PMI in place because you don’t want employees to wait months to have an operation on the NHS. They want them to get back to their state of health and return to work.”

Hitting the pocket

According to the Association of British Insurers, increases in IPT cost businesses nearly £150m for each 1 per cent rise, which in turn lowers the spending power of consumers by as much £100 a year. What is more, the recent tax jump has affected 3m PMI and cash plan policies and could add more than £40 a year to the average PMI contract. Mr Wood explains that these costs are challenging for insurers. “Most mutuals are paying 70 pence in the pound back out [in claims] so it further puts a strain on cost ratios, because cash plans are an insurance that we do pay back on. The whole cash plan movement is paying back millions of pounds each year.”

Two rises in IPT in the past year have prompted concerns whether these increases will continue. Mr MacEwan says the tax is “likely to go up again” because of the economic conditions. “We have a country that is in the grip of austerity and a chancellor who’s checking every mattress for every spare bit of cash.”