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);
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