Policy paper

Insurance Premium Tax: increase to standard rate

Published 9 July 2015

This policy paper was withdrawn on 17 March 2016

This information has been updated please read Changes to Insurance Premium Tax: increase to standard rate.

This information has been updated please read Changes to Insurance Premium Tax: increase to standard rate.

Who is likely to be affected

All households and businesses that purchase insurance which is not exempt from Insurance Premium Tax (IPT). All insurers who provide non-exempt insurance cover for UK risks.

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 3.5%.

Policy objective

This measure will increase the revenue raised by IPT.

Background to the measure

This measure was announced at Summer Budget 2015.

Detailed proposal

Operative date

This measure will have effect from the date that Summer Finance Bill 2015 receives Royal Assent. The new standard rate will be due on premiums treated by the legislation as received on or after 1 November 2015, except where insurers operate a special accounting scheme. In that latter case, the new standard rate is only applied to premiums relating to risks covered by the terms of a contract entered into after 1 November 2015. From 1 March 2016, the new standard rate applies to all premiums, regardless of when the contract was entered into.

Current law

Currently the IPT standard rate is 6%, as set out in Part 3, Section 51 of Finance Act 1994. Insurance which is exempt from IPT is defined in Part 1, Section 70 of Finance Act 1994. Certain categories of insurance are subject to a higher rate (20%) of IPT and these are set out in Part II, Schedule 6A of the Finance Act 1994.

Proposed revisions

Legislation will be introduced in Summer Finance Bill 2015 to amend the Finance Act 1994, Part III, section 51 to change the standard rate of IPT. The new standard rate will generally be due from 1 November 2015, 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 March 2016, where the premium relates to risks covered by the terms of a contract entered into before 1 November 2015.

Summary of impacts

Exchequer impact (£m)	2015 to 2016	2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021
	+530	+1460	+1510	+1530	+1550	+1580
	These figures are set out in Table 2.1 of Summer Budget 2015 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Summer Budget 2015.
Economic impact	The changes to insurance premium tax would likely have a small positive impact on Consumer Price Index inflation of approximately +0.01 percentage points in 2015 to 2016 and 2016 to 2017. The costing 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.
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. There are around about 20,000 insurers, brokers and agents in the UK who will incur one-off costs 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 will have to change the details of their contracts but by allowing a delay 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	Small and micro businesses assessment: this measure is expected to have a negligible impact on small and micro businesses. 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 Helen West on Telephone: 03000 585836, email: helen.west@hmrc.gsi.gov.uk.