Little-known stealth tax on insurance will raise £46 billion over the next five years – more than road tax
- The tax on insurance premiums was ignored in the budget and will continue to rake in billions
A little-known stealth tax on insurance will earn the government £46 billion over the next five years – more than road tax.
The insurance premium tax (IPT) adds 12 percent to the price of car, home and pet insurance, and 20 percent to travel insurance and many forms of additional coverage.
IPT is one of the least known taxes in Britain, with 67 percent of adults having no idea what it is, according to the Association of British Insurers.
Despite the lack of knowledge surrounding it, IPT is quickly becoming one of the most expensive stealth taxes.
In the positive sense: IPT is now a tax comparable to household names such as road and inheritance tax
According to forecasts from the Office for Budget Responsibility (OBR), IPT will rake in £46 billion between this financial year and 2030.
That is 40 percent more than the £32.9 billion paid in the previous five years, and an increase of 132 percent on the previous five years (£19.8 billion).
Not only that, but the amount insurers are expected to pay in IPT has also increased.
The OBR forecast that IPT will rake in £42.4 billion over the next five years by the time of the 2024 Spring Budget, but has now upgraded that to £46 billion.
The IPT is charged directly to insurers, who then usually pass on the majority of the costs to the households that take out the product.
The level of IPT has come under fire from the likes of the ABI and the British Insurance Brokers’ Association, which called on Chancellor Rachel Reeves to cut tax in her latest budget, which she failed to do.
In 2030, the IPT will generate more than well-known taxes such as tobacco excise duty, road tax and air passenger tax, and almost as much as alcohol excise duty and inheritance tax.
But unlike the “sin taxes” mentioned above, IPT is a tax on doing the right thing: being responsible and getting insurance.
IPT contributes to higher car insurance prices for many and, according to the Motor Insurers Bureau, has a direct link to the number of uninsured drivers.
The current high level of IPT is due to rising insurance costs. Car insurance is the biggest culprit, with an average premium of £622 per year, up 48 per cent in two years.
Because the IPT is calculated as a percentage of the total premium, the IPT increases as premiums increase.
This is clearly reflected in government figures, which show that IPT revenues remained fairly stable between 2018/19 and 2021/22, from just £6.2 billion per year to £6.6 billion.
But as car insurance premiums started to rise in early 2022, so did the level of IPT paid, rising sharply to £7.3bn in 2022/23 and £8.4bn in 2023/24.
Brett Hill, head of health and protection at financial consultancy Broadstone, said: ‘While it is positive that the IPT rate has not been increased by the Chancellor as speculated, she can nevertheless look forward to IPT receiving a £3.53 billion boost in state revenues. in the next five years.
‘Rising premiums are severely impacting the affordability of essential insurance products across the board, from car insurance to home cover, hitting consumers hard.
‘The picture is even more worrying when it comes to health insurance, where premiums are rising due to high claims and other inflationary pressures, leaving some customers struggling to pay their renewal premiums.’
Although IPT is technically a tax on insurers, in practice the tax is applied to the ‘real’ cost of insurance and then passed on to consumers in the form of higher premiums.
The only coverage that does not charge for IPT is life insurance and some forms of health insurance.
The increases are due to steps taken by the Conservative government between January 2011 and June 2017. During that time, the IPT rate grew from 5 percent to 12 percent.
Previously, the rate was unchanged at 5 percent between 1999 and 2011.
The Ministry of Finance has been contacted for comment.
