In Focus: Tax Year End  

Insurance premium tax reform could impact protection

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. 

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  is senior consulting manager at Sovos




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.