Insurance premium tax reform could impact protection

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Insurance premium tax reform could impact protection

It is rare to see a change in insurance premium tax, especially in comparison to VAT, which has been both raised and lowered by recent UK governments.

However, the UK’s exit from the EU has opened the doors for a possible change in this area and this could affect products not traditionally charged IPT, such as life insurance and protection.

The standard rate of IPT at 12 per cent has not changed since 2017 after it doubled in less than two years from its rate of 6 per cent in 2015. The Association of British Insurers has previously referred to IPT as "the mother of all stealth taxes" because not all insurers detail the tax component, which goes straight to HM Revenue & Customs. IPT is charged on products such as buildings insurance for home owners with a mortgage, and car insurance. 

  is senior consulting manager at Sovos



Life and long-term insurance products such as income protection and permanent health insurance of at least five years could become subject to VAT.Russell Brown


It is likely the insurance market can expect to see IPT rates either adjusted or abolished altogether by the May 2024 general election. If IPT changes, the insurance market will be directly affected, bringing several potential shifts that insurers, brokers and businesses will need to consider.

Could IPT be changed to VAT?

One consequence of Brexit might be that the government applies a 20 per cent standard rate of VAT to most taxable, non-life insurance policies, rather than the current 12 per cent. The increase in the UK IPT standard rate from 6 per cent to 12 per cent did not generate as much tax revenue as anticipated. This is mainly down to non-admitted, non-EEA insurers who did not always pay the tax – policyholders can only be assessed by HMRC for the unpaid tax under specific circumstances, which is rare. 

Changing IPT to VAT could produce a different outcome, by imposing any tax liability onto policyholders if non-compliant insurers fail to meet their obligations. On the other hand, raising the current tax rate by 8 per cent would be unpopular with many voters, and seen as a stealth tax that is paid for through increased insurance premiums.

Another possibility is that the current IPT rate of 12 per cent could be kept for compulsory insurance that is needed by private individuals, such as motor and property insurance. This strategy would still allow the government to charge 20 per cent on other types of insurance taken out by businesses, such as director's and officer's liability, that have no social implications. In most cases, VAT-registered businesses could recover input VAT on their premiums, which they cannot do with IPT as it is an irrecoverable cost to the end consumer.

Impact on the insurance market

If IPT changes are implemented, the administrative burden on the insurance industry will increase. Currently, insurers mostly rely on brokers to ensure policies are taxed correctly. Therefore, any administrative changes would also require broker approval before implementation can begin.

As well as IPT rates, the entire reporting process is also subject to change. For instance, an annual return could replace quarterly returns, as well as potential changes to the contents of returns. In other words, underwriters would need to spend a lot longer meeting reporting requirements.

Different rates of taxation on policies sold by brokers would have to be determined by the government. All policies could be taxed at 20 per cent or 12 per cent, or VAT rates could vary based on insurance type – thereby generating more revenue for the government. 

Insurance companies should consider the social aspects of such a tax, as it will inevitably be passed on to end users. Life and long-term insurance products such as income protection and permanent health insurance of at least five years – which are deemed to be lifestyle choices for the insured and are exempt from IPT – could become subject to VAT. A reduced rate of 12 per cent could be charged to avoid discouraging people from taking out such insurance.

VAT would be passed onto the consumer, meaning there is more of a social impact for the government and advisers to think about.

This approach could be used by the government to fund the short gap in the revenue they could have by charging 12 per cent on motor and property insurance to private individuals instead of 20 per cent.

It could also be argued that as these types of policies are more likely to be taken out by people who are middle to higher income wage earners that they would not be dissuaded from taking out such lifestyle insurance products just because they have become subject to VAT, so it may be a good way for the government to increase their tax revenue by implementing a change on people who can afford it.

However, with these potential changes, insurers will be reliant on brokers to check whether their client is a business or private individual. As such, brokers will need to be heavily involved in these discussions, as they play a crucial role in ensuring correct taxation and maintaining records, which they pass onto insurers. For instance, one key piece of information brokers would need to keep and pass on would be the policyholder’s VAT registration number – in case of any questions from HMRC.

Preparing for the future

If the replacement of IPT with VAT is confirmed, brokers would need some lead time to implement this change. When IPT was last raised, brokers were given time with transitional measures in place to ensure they charged the correct tax rates. As brokers are unlikely to be made responsible for settling VAT, they are likely to be less resistant to this change than other options.

However, VAT would then be passed onto the consumer, meaning there is more of a social impact for the government and advisers to think about.

The government currently has more urgent issues on its plate, but HM Treasury and HMRC will continue to consult with interested parties, such as insurers’ representative bodies (ABI and the International Underwriting Association), brokers’ representative bodies (London & International Insurance Brokers Association) and other organisations on this change.

The next step will be to conduct another consultation and schedule regular industry liaison group meetings between HMRC and interested parties. This process will take time, but UK-based insurers and brokers should prepare for changes in the coming years.

Russell Brown is senior consulting manager at Sovos