On 16th March 2016, the government announced that the
Insurance Premium Tax (IPT) will be subject to another hike. Yet, it will only
increase by 0.5 per cent and all the revenue generated from it will fund national
flood defences and resilience.
This hike comes just after a previous 3.5 per cent
increase on 1st November 2015—resulting in a tax increase of 66.6 per cent
since then. While this hike is considerably smaller than the previous one, you
should nevertheless familiarise yourself with the increase and its potential
repercussions.
Understanding
the Tax Hike
The standard IPT will be increased by 0.5 per
cent—raising it from 9.5 per cent to 10 per cent—and will apply to insurance
premiums starting on 1st October 2016. The government estimates that the hike
will generate an extra £80 million in its first year and then an annual average
of £205 million in subsequent years.
This annual revenue boost will come from all
households and businesses that pay IPT on their insurance. However, there are
several policies that are exempt from the IPT, including the following.
·
Life insurance
·
Insurance for
commercial ships and aircraft
·
Insurance for
commercial goods in international transit
·
Premiums for
risks located outside the United Kingdom
·
Export finance
Potential
Repercussions
Despite the rise in costs, the government is confident
that there will only be negligible impacts to the public and private sectors.
These include one-off costs for insurers to update their systems to include the
new tax rate.
The government estimates that the average combined
home and contents policy will increase by £1, and the average motor policy will
increase by £2 per year. But this is in addition to the extra £100 added to the
average household’s insurance bill from the last increase, according to the
Association of British Insurers (ABI).
The ABI has also estimated that the 0.5 per cent
increase could cost UK businesses as much as £75 million. Those losses, coupled
with consumers’ potentially lower spending power due to higher insurance bills,
could further squeeze businesses’ profit margins. In response to this squeeze,
the Automobile Association (AA) is cautioning against businesses and motorists
forgoing cover in order to save money, given that a 2015 AA poll found that 87
per cent of motorists believed that the IPT was unfair and that increases will
encourage some drivers to attempt to drive without insurance.
However, the government believes that the IPT hike
will benefit the UK economy, arguing that it brings the United Kingdom’s IPT in
line with other countries. At 10 per cent, the United Kingdom has one of the
lowest IPT rates in Europe—still much lower than Germany’s 19 per cent IPT and
Italy’s 21.25 per cent IPT. 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
Happens Now?
In2Matrix
(UK) Ltd is committed to providing you with the most robust, cost-effective
cover and will do everything in our power to ensure that the IPT increase has
the smallest possible impact on your policy.
