What does the chart show?
It shows a steep increase in the amount of money raised from insurance premium tax (IPT) over the past 25 years. In 1994-95 — the year the tax was first introduced — it raised £117m for government coffers. By 2018-19, this had skyrocketed to a record £6.2bn.
There has been a particularly dramatic spike in the past five years — which has seen the IPT tax take double. Cash receipts totalled £3bn in 2015-16 and have increased at roughly £1bn each year since. In contrast, during the first two decades of the tax’s existence it never raised more than £3bn a year.
What is the insurance premium tax?
IPT is a tax on general insurance premiums. It affects several types of policies including home, car, pet, travel and private medical insurance.
There are two rates at which IPT is charged: a standard rate of 12 per cent or a higher rate at 20 per cent. The higher rate applies to travel insurance, mechanical or electrical appliances insurance and some vehicle insurance.
The tax works in a similar way to VAT, as it is added as a percentage to the total cost of an insurance premium.
Life insurance is exempt from IPT, as is most other long-term insurance.
Why has the IPT tax take been going up?
Inflation is a factor, since over time rising insurance costs result in more cash being raised in tax.
However, a key factor behind the recent surge is the increase in the rates at which IPT is charged. Chancellor Ken Clarke brought in the tax in 1994 at a flat rate of 2.5 per cent. A higher rate was added in 1997, set at 17.5 per cent. And over the next couple of years the standard rate crept up to 5 per cent.
Things really started to change from 2011. The standard rate rose to 6 per cent and the higher rate hit 20 per cent. And in the years since, the standard rate has continued climbing — to 9.5 per cent in November 2015, 10 per cent in October 2016 and 12 per cent in June 2017.
“[IPT] is a handy money spinner for the Treasury, because in the last tax year it raked in more than inheritance tax did, and yet the tax is relatively hidden,” says Sarah Coles, personal finance analyst at Hargreaves Lansdown. “When we buy insurance we get used to prices climbing each year, and it can be difficult to distinguish the tax hike from the rest of the price rise.”
How does IPT affect the cost of insurance?
IPT is an indirect tax. Technically it is levied on insurers, but the majority of providers pass the costs on to their customers, thereby increasing the prices consumers pay. The Association of British Insurers, a trade body, which has been campaigning against the recent rate rises, has described IPT as “the mother of all stealth taxes”.
James Dalton, director of general insurance policy at the ABI, says: “The Treasury is taking in more money from people responsibly protecting themselves, their families and their belongings by buying insurance than it takes in from so-called sin taxes such as levies on beer or on gambling. [This] is why we will once again be warning the chancellor come Budget time — IPT is unfair and must not be raised any further.”
However, the Treasury said: “Many countries charge taxes on insurance premiums, and within the EU there are several countries which charge significantly higher rates than the UK.
“We have announced recent changes to the tax at fiscal events in a transparent way.”