Changes to Insurance Premium Tax: increase to standard rate
Published 16 March 2016
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Who is likely to be affected
All insurers who provide non-exempt insurance cover for UK risks and the brokers and agents who act for them.
All households and businesses that purchase insurance which is not exempt from Insurance Premium Tax (IPT), where the insurer chooses to pass on the IPT rate rise to its customers.
General description of the measure
The measure will increase the rate of IPT paid on premiums which are taxed at the standard rate of IPT by 0.5%.
Policy objective
This measure will help the government fund flood defences and resilience.
Background to the measure
This measure was announced at Budget 2016.
Detailed proposal
Operative date
The new standard rate of IPT will be due on insurance premiums treated by the legislation as received on or after 1 October 2016, except where insurers operate a special accounting scheme. From 1 February 2017, the new rate applies to all premiums, regardless of when the contract was entered into.
Current law
The relevant legislation is Part III of Finance Act (FA) 1994. Currently the IPT standard rate is 9.5%, as provided by section 51 of FA1994. Insurance contracts which are exempt from IPT are set out in Part 1 of Schedule 7A to FA1994. Certain categories of insurance are subject to a higher rate (20%) of IPT and these are set out in Part II of Schedule 6A to FA1994.
Proposed revisions
Legislation will be introduced in Finance Bill 2016 to amend section 51 of FA1994 to change the standard rate of IPT to 10%.
The new standard rate will be due from 1 October 2016, with an exception for those insurers who use a special accounting scheme rather than the cash receipt method. The exception operates to require the new standard rate to be applied by them only to premiums received on or after 1 February 2017, where the premium relates to risks covered by the terms of a contract entered into before 1 October 2016.
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|
| +80 | +200 | +205 | +205 | +210 |
These figures are set out in Table 2.1 of Budget 2016 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costing document published alongside Budget 2016.
Economic impact
The changes to IPT will have a small positive impact on Consumer price indices (CPI) inflation.
The costing is adjusted for behavioural responses resulting from any change associated to prices of general insurance products. It also takes into account a small reduction in the demand for standard-rated insurance and a small increase in tax planning activity by insurance companies.
Impact on individuals, households and families
The measure is not expected to impact on family formation, stability or breakdown.
The measure is expected to have a small impact on individuals and households purchasing insurance which is not exempt from IPT, if insurers choose to pass on the IPT rate rise to customers.
Equalities impacts
This measure will not impact on those disabled people who are eligible for the Motability Scheme as insurance for vehicles provided under the scheme is exempt from IPT.
No other impacts affecting those sharing other protected characteristics have been identified.
Impact on business including civil society organisations
This measure is expected to have no administrative impact on businesses purchasing insurance which is not exempt from IPT, but the cost of purchasing insurance may rise, if Insurers choose to pass on the IPT rate rise.
There are in the region of 1,000 insurers in the UK who will incur one-off costs in updating their systems to apply the new tax rate. The government expects this additional burden to be negligible. This measure is expected to have no ongoing administration burdens.
Insurers, brokers and agents will have to change the details of their contracts but by allowing a delay to 1 October 2016 before the full impact of the rate rise is felt, the impact of this will be minimised.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
There will be no significant operational costs for HMRC in implementing these changes.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from tax returns and receipts.
Further advice
If you have any questions about this change, please contact Ishrat Ali on Telephone: 03000 585850 or email: ishrat.ali@hmrc.gsi.gov.uk.