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Insurance premium tax

Insurance premium tax

Insurance premium tax (IPT) is charged on all insurance policies for vehicles such as cars and vans, but some vehicle owners end up paying a higher rate than others. We look at why this is, and how you can keep your car insurance costs low.

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What is insurance premium tax?

Insurance premium tax is a tax on the premium you pay when you are buying insurance for your car. It also applies to home insurance and pet insurance products.

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 it reflects the underlying cost of the insurance.

What is the rate of Insurance premium tax for cars?

There are two rates of Insurance Premium Tax (IPT) which might apply to vehicles such as cars and vans.

Firstly, there is a standard rate of IPT of 12%, which applies to most car or van insurance policies. There is also a 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.

Insurance premium tax

Why do we have to pay Insurance premium tax?

IPT was introduced in 1994 by the government in order to raise revenue from the insurance sector, which was then viewed as being under-taxed as it was not subject to VAT like other goods and services.

The rate of IPT stood at just 2.5% when it was first introduced. Car insurance was not subject to VAT and so the government saw an opportunity to raise money via a different type of taxation.

While IPT charges remained stable until 1997, the rate has increased nearly fivefold since it was introduced, with more dramatic increases being introduced in the last few years.

Why do customers have to pay Insurance premium tax when they buy insurance?

The treasury has described IPT as a tax on insurers, and points out that it's up to insurers whether to pass the costs on to customers. However, in most cases, IPT is added to customers’ premiums and any increases will directly affect the price they pay.

Because insurance premium tax is a flat rate across all policies, people with the highest premiums are most affected by IPT. For car insurance policies this impacts inexperienced drivers, and for home insurance people who live in high-risk areas are likely to pay the most IPT.

How much is Insurance premium tax (IPT)?

The standard IPT rate is now 12%. Despite the sharp increases in recent years, the rate of IPT in the UK remains lower than in many other European countries. The current 12% rate is the sixth highest in the EU. 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 and therefore attracts a higher rate of interest than a standalone insurance policy.

For this reason, 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.

Will I have to pay IPT if my car dealership offers free insurance?

The higher rate of IPT is 20% and applies to insurance when it's sold in relation to goods and services, which are subject to VAT, such as new cars.

If the dealer provides free or discounted insurance, the higher rate of IPT doesn't apply. If the dealership is offering free insurance for a year, and then an extra year of insurance in addition to that, the higher rate of IPT will apply to the premium for the second year only.

What does it mean for insurance costs?

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.

Is the rate of IPT likely to rise?

The ABI is urging the Government to help motorists by reducing 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 £6.3 billion 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.

How can I save on my car insurance?

The best way to save on your insurance costs, reduce IPT tax and beat any price rises is to shop around for a better deal.

Get started by entering your registration or searching for your car below:

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