Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Insurance Premium Tax

From
HM Revenue & Customs
Updated
, see all updates

Overview and the law: the rate of tax

The tax rates, since the introduction of IPT, are given below:

1 October 1994 a single rate of 2.5% applied when the tax was first introduced.

The standard rate:

  • 1 April 1997 increased to 4%;
  • 1 July 1999 increased to 5%;
  • 4 January 2011 increased to 6%;
  • 1 November 2015 increased to 9.5%;
  • 1 October 2016 increases to 10%.

The higher rate:

  • 1 April 1997 a selective higher rate of 17.5% was introduced;
  • 4 January 2011 higher rate increased to 20%.

Section 51 of the Finance Act 1994 gives the current rates of tax:

51(1) Tax shall be charged-

(a) at the higher rate in the case of a premium which is liable to tax at that rate; and

(b) at the standard rate in any other case.

51(2) For the purposes of this Part-

(a) the higher rate is 20 per cent; and

(b) the standard rate is 9.5 per cent.

The rate of tax applies to the gross premium. Therefore, where a premium relates entirely to a taxable risk the tax is charged on the total premium which includes:

  • the risk;
  • costs of administration;
  • commission charges;
  • facilities for paying in instalments or making deferred payments (unless the charge is made under a separate contract for example one regulated by the Consumer Credit Act);
  • tax.

However, the terms ‘gross’ and ‘net’ are open to a wide interpretation in the insurance industry and it is, perhaps, easier to describe the way the tax is calculated (where a premium relates entirely to a taxable risk) as

  CHARGEABLE AMOUNT + IPT = PREMIUM

This means that IPT can be extracted from the amount of an entirely taxable premium by the use of the following calculation:

  PREMIUM x 3/53 = IPT

3/53, is the IPT fraction when the rate is 6%. The IPT fraction, like the VAT fraction, is derived from the formula:

  Rate of tax ÷ (100 + rate of tax)

IPT fractions for other rates of IPT are:

  with the rate at 20%        1/6

  with the rate at 5%          1/21

  with the rate at 17.5%     7/47

  with the rate at 4%          1/26

  with the rate at 2.5%       1/41

 with the rate at 9.5%        19/219

 with the rate at 10%         1/10