By: Gibbs Laidler
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Insurance Premium Tax – 9.5%
On 8 July 2015 George Osborne delivered his Summer Budget 2015 to Parliament, the first budget since the General Election. With a Conservative majority, Osborne had the opportunity to enact policies that he believes “puts security first” and provides a “Budget for working people”’.
One of the more controversial and unexpected measures of the Budget was Osborne’s increase to the Insurance Premium Tax (IPT). Considered a necessity by the government but a surprise ‘stealth’ tax by industry insiders, the IPT increase has been met with consternation and confusion.
Understanding the Tax Hike
The standard rate of IPT has increased by 3.5% — raising it to 9.5% — and applied to some insurance premiums from 1 November 2015, and all qualifying premiums from 1 March 2016. The government estimates the hike will generate an extra £1.75 billion per year.
This annual revenue boost will come from all households and businesses that pay the IPT on insurance policies. However, there are several types of policies that are exempt from IPT, including the following:
- Most long-term insurance policies
- Insurance for commercial ships and aircraft
- Insurance for commercial goods in international transit
- Premiums for risks located outside the United Kingdom
Why the Controversy?
Despite the 56 per cent rise in costs, the government is confident that there will be only negligible impacts to both the public and private sectors. These impacts include one-off costs for insurers to update their systems to include the new tax rate, as well as an annual increase of about £35 for the average two-car family.
However, according to some industry experts, the effects may be more far reaching and damaging than initially expected. Just a slight rise in premiums could make vital cover too expensive, resulting in more uninsured drivers and businesses. For example, experts estimate that premiums for young drivers could jump by £40, causing them to limit or forego cover altogether.
However, Osborne is confident that the IPT hike will not prejudice the UK economy, arguing that it brings the UK’s IPT in line with other countries. At 9.5%, the United Kingdom has one of the lowest IPT rates in Europe—much lower than Germany’s 19% IPT and Italy’s 21.5% rate. 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 can you do now to prepare for any premium increases?
- Give yourself time to discover the impacts and options in respect of the additional increases.
- Evaluate your existing premiums and project possible increases.
- Ensure that renewal planning is not left to the last minute. Make sure you discuss the effects in-house, and talk to a member of the Gibbs Laidler team in good time so that you appreciate the potential financial impact of IPT.
- Calculate the additional tax cost for all policy renewals from November 2015 based on existing levels of premium and make a budget provision for any increase.
- Where your budgets do not allow for such increases, explore ways and means of reducing costs with a member of the Gibbs Laidler team.
- Lastly, discuss the renewal or tender arrangements with the Gibbs Laidler team. With our in- depth knowledge of insurance and tender procedures we will endeavour to recover the costs associated with the increases.