On 16th March 2016, George Osbourne delivered his 2016 Budget to parliament, of which he announced that insurance premium tax (IPT) will increase to 10%. The increased rate will come into effect on 1st October 2016.
Since July’s 2015’s Summer Budget, the IPT has increased from 6% to a new 10% rate – a 66% increase within the past 12 months. The IPT increase will apply to insurance premiums starting on 1st October 2016. The government estimates that the hike will generate an extra £80 million in its first year and then an annual average of £205 million in subsequent years.
This annual revenue boost will come from all households and businesses that pay IPT on their insurance. However, there are several policies that are exempt from the IPT, including the following.
- Life insurance
- Insurance for commercial ships and aircraft
- Insurance for commercial goods in international transit
- Premiums for risks located outside the United Kingdom
- Export finance
New and Existing Policies
All insurance policies with a start or renewal date on or after 1st October will be liable for the 10% IPT. However, insurance policies with a start or renewal date before the 1st October will be liable for the existing IPT rate of 9.5%, provided the premium is paid by the 31st January 2017.
The higher rate of 10% IPT will be applied when the policy is accepted by the policyholder rather than when it is quoted.
The higher rate IPT of 10% refers to the renewal date rather than the date of which instructions to proceed are provided.
For example, a policy with an inception date of 1st October which we receive instructions to proceed on the 30th September will attract a 10% IPT rate.
Whereas, if a policy has a 30th September renewal date and the policy is placed on extension for 7 days prior to accepting renewal terms will be liable to a 9.5% rate of IPT.
Additional & Return Policies
Any return premium is given at the rate of tax charged when the policies premium was paid.
Additional premiums after 1st February 2017 are charged at the new 10% IPT rate. Any additional premiums for policies incepting before the 1st October 2016 will attract a 9.5% IPT rate provided the premium is paid by the 31st January 2017.
All premiums paid on or after 1st February 2017 will be liable to 10% IPT irrespective of the rate received from the policyholder or the start or renewal date of the policy contract.
Adler Insurance Brokers are committed to ensuring that our clients obtain competitive rates, however, as IPT is not recoverable, the bottom line of this increase will be borne by anyone buying an insurance contract.
Further information can be found on the HMRC website.
Despite the rise in costs, the government is confident that there will only be negligible impacts to the public and private sectors. These include one-off costs for insurers to update their systems to include the new tax rate.
The government estimates that the average combined home and contents policy will increase by £1, and the average motor policy will increase by £2 per year. But this is in addition to the extra £100 added to the average household’s insurance bill from the last increase, according to the Association of British Insurers (ABI).
The ABI has also estimated that the 0.5% increase could cost UK businesses as much as £75 million. Those losses, coupled with consumers’ potentially lower spending power due to higher insurance bills, could further squeeze businesses’ profit margins. In response to this squeeze, the Automobile Association (AA) is cautioning against businesses and motorists foregoing cover in order to save money, given that a 2015 AA poll found that 87% of motorists believed that the IPT was unfair and that increases will encourage some drivers to attempt to drive without insurance.
However, the government believes that the IPT increase will benefit the UK economy, arguing that it brings the United Kingdom line with other countries. At 10%, the United Kingdom has one of the lowest IPT rates in Europe—still much lower than Germany’s 19% and Italy’s 21.25%. With competitive rates and a robust, diversified insurance industry, the government hopes to continue attracting new international business due to its relatively low IPT.
What Happens Now?
Adler Insurance Brokers is committed to providing you with the most robust, cost-effective cover and will do everything in our power to ensure that the increase has the smallest possible impact on your policy.
If you would like to discuss the impact these changes will have on your business or personal insurances, please get in touch.