A tax on responsibility?

By Sara Rainwater, operations director


I hate insurance premium tax (IPT) almost as much as I hate stamp duty land tax (see my previous rant about that one here). 


I consider myself a responsible adult. Like the vast majority of the population, I like to play by the rules, look after my own, and make sure my family is covered. So I get irate about IPT a few times a year when I’m doing things like renewing my car insurance or the insurance on my house. 


And I got mad about it again this week when I went to buy cover for our first family pet: Flora, the cat. Pet owners are hit with a 12 per cent tax for being responsible and taking out insurance to cover unexpected vet costs.


So in my IPT-induced rage, I decided to dig a little deeper into the tax. What exactly is it, and why is it levied on people who are just being responsible?  


It was first introduced in 1994 by chancellor Ken Clarke as a means of raising tax from the insurance sector, which was deemed under-taxed and exempt from the VAT regime. It is applied to most forms of insurance including home; car; pet; travel; and private medical care. But for taxpayers across the country, many of these are features of everyday life - in the case of cars, we’re legally obligated to purchase cover and pay the tax! 


Successive governments have increased the tax. Initially, it was set at a flat rate of 2.5 per cent. A higher rate on travel, mechanical or electrical appliances and specific vehicle insurance policies followed in 1997, set at 17.5 per cent - this coincided with an increase of the standard rate to four per cent. Other than another increase to the standard rate in 1999, raising it to five per cent, the tax remained unchanged. 


That was until 2011 when the standard rate was increased yet again to six per cent and the higher rate to 20 per cent. A further three hikes since then have seen the standard rate rise to its current rate at 12 per cent. 


Politicians have often justified these rises by comparing the rates to VAT. But that’s not the whole story. The economic value of a tomato, for example, covers the entire costs and profit of bringing the tomato to the retail outlet. The same cannot be said for insurance. The economic value of insurance does not relate to the whole premium, in fact, the cost of insurance premiums is similar to making deposits into a savings account. You wouldn’t consider regular bank accounts as equivalent to normal goods and services, why insurance premiums?


But it's easy to see why governments have increased the rate of IPT; it's a handy revenue raiser. In 1994-95 it brought in £117 million, but fast forward to 2020-21 and the figure stands at £6.3 billion - that’s almost 54 times more than when it was introduced. To put that in perspective, IPT now raises more than stamp duty on shares (£3.7 billion), the TV licence fee (£3.7 billion) and inheritance tax (£5.3 billion).


Some may argue this is a good thing - after all, it's the insurance companies coughing up. They couldn't be more wrong. IPT has essentially the same impact as VAT: it is an indirect tax. So while technically it is a levy on the insurers, in reality it is paid by their consumers through higher insurance prices. 


What if the government decided to stop taxing those taking out insurance? Well, the average cost of car insurance could be £50 cheaper, pet insurance £17 cheaper and home insurance £16 cheaper. To some that may not seem a lot, but with British taxpayers already facing a 70-year high tax burden and a cost of living crisis, every penny really does count. 


IPT is one of those niggly little taxes that penalises people for doing the right thing. At the very least the government should scrap the higher rate and cut the standard rate so it is actually equivalent to VAT, as we suggested in 2017. The chancellor says he wants to lower taxes, so he can make a start by reforming IPT and protect responsible taxpayers from this punishing premium. 

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