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.
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.”