IPT stands for Insurance Premium Tax, which was introduced in 1994.
Insurance premium tax is a tax on the premium you pay when you're buying insurance for your car.
It's charged according to two rates, a standard rate of 12% and a higher rate of 20%. The higher rate of insurance premium tax is charged on travel insurance, electrical appliance insurance and some vehicle insurance.
You need to know about IPT as it can increase the cost of your car insurance.
The insurance premium tax fee is charged as a percentage of the underlying insurance premium.
If your insurance premium is high – for example if you're a young driver or your car is an expensive make or model – then your IPT will be higher because the underlying cost of the insurance is higher.
IPT is a compulsory tax which insurance companies have to pay. The government says it is up to insurers whether to pass the cost of IPT on to customers.
In most cases, IPT is added to customers' premiums and any increases will directly affect the price they pay.
There are two rates of Insurance Premium Tax (IPT), which might apply to vehicles such as, cars and vans.
The standard rate of IPT of 12%, which applies to most car or van insurance policies.
The higher rate of 20%, which may apply to insurance policies that you take out with a car dealership when you are buying a new car
So, at 12%, if your annual car insurance premium is £420, £45 will be insurance premium tax.
Before 1994 insurance premiums did not attract any additional taxes, such as VAT, that are applied to many other goods and services.
The government introduced IPT as it felt insurance was being under taxed.
Car insurance was not subject to VAT, and so the government saw an opportunity to raise money via a different type of taxation.
The rate of IPT stood at just 2.5% when it was first introduced in 1994, and while IPT charges remained stable until 1997, the rate has increased nearly fivefold since it was introduced.
It was last increased in 2017, when the standard rate was set at 12%.
Yes, they do, IPT is added to customers’ premiums and any increases will directly affect the price they pay.
However it is not a flat fee across all policies:
People with the highest premiums are most affected by IPT
When it comes to car insurance inexperienced drivers will pay the most IT
Despite the sharp increases in recent years, the rate of IPT in the UK remains lower than in many other European countries and the current 12% rate is the sixth highest in the EU region.
If you buy a new car and accept the insurance offered by the dealership then the tax rate may be 20%.
This is because the insurance is regarded as being related to the sale of the car so is set at the same rate as the VAT you pay on the car.
This is designed to try and prevent tax avoidance, where a dealer could claim part of the car’s cost was insurance, seeing less tax than if it was included in the car’s price.
By making IPT the same as VAT in these cases, this option is removed.
It's best to arrange insurance yourself before you drive the car away or ask the dealership about the rate of IPT you will have to pay if you accept their insurance offer that is linked to the sale of the car.
Insurance premium tax affects an estimated 25 million car insurance policies and 25 million home insurance policies throughout the UK.
According to the Association of British Insurers (ABI), the IPT insurance tax increases introduced will add more than £50 a year to the average comprehensive car policy.
The ABI’s latest Motor Insurance Premium Tracker, which covers figures to the end of 2019, highlights that the average price paid for comprehensive motor insurance is at historically high levels
The ABI’s Tracker is the only survey that looks at the price consumers actually pay for their cover, rather than the price they are quoted.
FACT! According to the ABI the UK government raked in £560m from IPT in just one month - December 2019. This was more than beer (£324m), spirits (£250m) and betting and gambling (£349m) in the same month.
The ABI is urging the government to reduce the rate of Insurance Premium Tax (IPT) on an insurance premium for a car or van.
It says the rate has doubled since 2015 and the government collects an estimated £6.3bn in IPT, more than that levied on beer, wine and gambling.
The latest figures show that the average motor premium paid in 2019 was £471, the third highest annual figure on record
This includes an insurance premium tax in 2019 or around £50 per policy
The best way to save on your insurance costs, reduce IPT tax and beat any price rises is to pay less for your car insurance and shop around for a better deal.
You can save on your car insurance if you are:
Experienced drivers and have a good driving record can still get a good deal on their insurance.
Drivers under 25, women and men, pay far more than drivers 25 and over. If you're not an experienced driver, you can cut car insurance costs by adding a named driver who is older and more experienced to the policy. But be careful to stick to the policies terms and conditions, and avoid fronting.
This is where a parent or more experienced driver acts as the main user of a car, even though it's the younger person regularly driving the vehicle.
The type of car you drive, with the car’s speed, security features, and value all playing a big part in setting your insurance premium.
This will result in a cheaper monthly premium. Before you take out car insurance make sure you can afford any voluntary excess. This excess is in addition to the compulsory excess set by your insurance provider. This is what you would have to pay if you ever have to claim.
Pay for your insurance in one go if you can. Spreading the cost of your car insurance over 12 payments, monthly, may seem cheaper, but remember you will normally be paying interest on top of the amount you pay towards your car insurance premium.
Limiting your miles makes you less of an insurance risk. Simply because you're reducing your risk of having an accident.
When you take out your car insurance policy the insurer always asks for an estimate of your maximum annual mileage
You need to try and keep your mileage low, although you need to be realistic as to how much you will drive
Having an alarm or immobiliser is considered a theft deterrent and by deterring car thieves you can reduce your car insurance. Not all insurers will offer this, so check first.
Black box, or telematics insurance can help reduce your car insurance over a period of time.
A small device, a black box, is installed in your car.
This then measures how fast you driver, when you brake, what time of day you drive how fast you accelerate and how you drive around corners
Some black boxes include an app which you can access on your phone
If you drive safely you may be rewarded with cheaper monthly premiums
You don’t need to own a car to get car insurance. Unlike a full car insurance policy you won’t build up a no claims bonus, but it does mean you can drive someone else’s car, as long as you have their permission. If you only plan to borrow a car you can also compare quotes for short-term or temporary car insurance
If you need to insure several cars check out multi-car insurance policies.
Multi insurance might also be suitable:
If you own more than one car
If you’re a family with more than one driver
If you’re a couple with more than one vehicle