Insurance Premium Tax
In the Government's emergency budget 22nd June 2010 The Chancellor, George Osborne announced an increase in the standard rate of Insurance Premium Tax (IPT) from the current 5% to 6% for policies with an inception or a renewal date on or after 4th January 2011.
"The standard rate of Insurance Premium Tax will increase from 5 per cent to 6 per cent from 4 January 2011. The standard rate applies to most general insurance premiums, such as home insurance." Insurance Premium Tax
Many commentators were not surprised by this move as the UK has one of the lowest rates in Europe with the average across the European Union being about 10%.
Unlike the VAT rate rise, which you can avoid by buying items before the rate change, with IPT the charge relates to when the insurance policy starts. Even if you pay in advance and the inception date or the renewal date is after 4th January your insurance intermediary is obliged to collect the higher rate and pass this on to the insurer who then pays it to HMRC.
If you take out a policy before 4th January and subsequently cancel it, any return premium that you are due will include IPT at 5%. The complexities of this are something of a worry to insurers and insurance intermediaries like ourselves. Our system calculates the IPT that we have to collect on the basis of the inception or renewal date (whichever applies) and then calculates the IPT due on any return premium on the same basis.
Whilst many consider that further increases in the IPT rate may be introduced in later budgets there is a difficult principal here for the Government. In the case of motor insurance it is compulsory for drivers to have a minimum level of insurance in order to drive on UK and European roads. The UK Government has reluctant to apply high levels of tax to compulsory or essential items. It is believed that this may be why IPT was at 5%, the same level as the VAT on household fuel. However having moved from 5% to 6% and faced no backlash IPT may be a tempting target for future increases.