What is Insurance Premium Tax (IPT)?

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Were you aware that there’s a tax on your insurance premiums? This could be why your monthly premium might be steeper than anticipated. Here’s a breakdown of what you might be charged and when.

What is Insurance Premium Tax?

Insurance Premium Tax (IPT) is a levy introduced by the UK government that is applied to the premiums of general insurance policies. This includes, but is not limited to, policies such as car insurance, home insurance, and pet insurance. The purpose behind IPT is to collect revenue for the government from the insurance sector.

There are two distinct rates of IPT in the UK:

Standard Rate

This currently stands at 12% and is applicable to most general insurance products like home, car, and pet insurance.

Higher Rate

This is pegged at 20% and is typically charged on insurance products like travel insurance, electrical appliance insurance, and certain types of vehicle insurance.

The higher rate is generally levied on insurance where there is an element of protection for goods or services that are also subject to Value Added Tax (VAT).

Car Insurance

It’s essential for policyholders to be aware that the cost of their insurance policy includes IPT, which can significantly influence the overall premium they have to pay.

Additionally, as IPT is a tax collected for the government, any changes to its rates could further impact the cost of insurance in the future.

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Which types of car insurance does the 20% Insurance Premium Tax rate apply to?

The 20% IPT rate, also known as the higher rate of Insurance Premium Tax, is primarily targeted at certain insurance products; however, in the realm of car insurance, there’s a specific instance where it may come into play. This typically concerns car insurance policies taken out on new cars that are purchased directly from a dealership.

New Car Bought At A Dealership

When you’re at a dealership and considering their insurance offers, it’s crucial to enquire about the IPT rate applicable. If the dealership provides you with an insurance quote, it might come with the higher 20% IPT rate attached. This is particularly relevant if the insurance is being offered as an added, optional purchase alongside the car.

However, it’s worth noting that if you’re presented with an offer of free car insurance as part of a promotional package or deal, the 20% IPT rate would not be a concern for you, as you’re not directly paying the premium.

In any case, always ensure you fully understand the breakdown of costs and tax implications before finalising any insurance policy, especially when making substantial commitments like purchasing a new car.

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Which types of insurance are exempt from Insurance Premium Tax?

While Insurance Premium Tax (IPT) is applied to a wide range of insurance products in the UK, there are indeed some exceptions where specific policies are exempted. Understanding these exemptions can be crucial, especially when budgeting for insurance needs.

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Exemptions from IPT include:

Cover for Disabled Drivers

Insurance for drivers who lease their cars through the Mobility Scheme is exempt. This is a nod to the government’s commitment to supporting disabled individuals and ensuring they have access to affordable transportation.


Mortgage Insurance

Insurance that provides cover for a borrower’s mortgage payments in the event they cannot meet them (for reasons like unemployment, sickness, or disability) is also free from IPT.

Whole of Life and Long-term Life/Health Policies

Insurance policies that provide whole-of-life cover, permanent health insurance, and other similar long-term life and health insurance products are exempt. However, it’s important to highlight that this does not include standard medical insurance.

In addition to the above, there are other niche policies and specific situations where IPT might not apply. Therefore, when considering an insurance purchase, it’s always a good idea to consult with a knowledgeable insurance provider or broker to gain clarity on any tax implications.

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How does Insurance Premium Tax (IPT) affect the price of car insurance?

Insurance Premium Tax (IPT) plays a pivotal role in determining the final price of an insurance policy. Essentially, IPT is a percentage of the premium that is appended to the overall cost of the insurance policy.

Mechanics of IPT

While IPT is an indirect tax imposed on insurance providers, it’s commonplace for these providers to transfer this additional cost to their customers.

Insurance Premium Tax Impacts Car Insurance

This is primarily done by incorporating it into the premium amount, leading to higher prices for policies.

Impact on Different Age Groups

Among the demographic groups, young drivers tend to bear the brunt of this tax more significantly. Their insurance premiums are naturally higher due to the perceived risk associated with new drivers.

Young Driver Car Insurance

With IPT applied, these already lofty premiums can become even more burdensome. Research has shown that drivers aged between 17-24 pay an average of £1,929 for their car insurance premiums.

When IPT is considered, this amount escalates, making car insurance a significant financial commitment for young individuals.

Additional Considerations

It’s also worth noting that any changes in the IPT rate by the government can lead to corresponding adjustments in insurance prices.

For consumers, this underscores the importance of being aware of IPT and its potential impact on their budgets.

Periodically shopping around and comparing car insurance quotes, leveraging no-claims discounts, and seeking other promotional offers can help in mitigating the added costs due to IPT.

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How can I get the cheapest car insurance?

In the midst of climbing costs and the increasing cost of living, securing affordable car insurance can feel like an uphill battle.

Cheapest Car Insurance

While some economic factors like inflation are beyond our control, there are still proactive measures you can employ to reduce your car insurance costs. Here are our top tips and strategies for securing cheap car insurance:

  1. Shop Around: Don’t just renew with your current provider without checking prices elsewhere. Compare quotes from different insurers using Comparoo or by consulting with brokers.

  2. Increase Your Excess: Voluntarily opting for a higher excess can reduce your premium. However, ensure you can afford the excess if you need to make a claim.

  3. No-Claims Bonus: Safeguard your no-claims discount as it can significantly decrease your premium over time. Some insurers offer to protect it for an extra fee.

  4. Limit Modifications: Modifications to your car, especially those that enhance performance, can push up insurance costs. If you can, keep your car as close to the manufacturer’s standard as possible.

  5. Secure Your Car: Install security devices like immobilisers or alarms. Parking in a garage or a secured location can also reduce your premium.

  6. Limit Your Mileage: If you can, try to reduce the number of miles you drive annually. Lower mileage can lead to cheaper insurance.

  7. Choose Your Car Wisely: Cars are grouped into insurance categories based on factors like repair costs, performance, and theft risk. Opt for cars in lower insurance groups.

  8. Consider Telematics: Some insurers offer discounts if you agree to have a ‘black box‘ fitted to your car. This device monitors your driving habits, rewarding safe drivers with lower premiums.

  9. Pay Annually: If feasible, pay for your insurance in an annual lump sum rather than monthly installments, as this often works out cheaper in the long run.

  10. Check for Discounts: Look out for special promotions, loyalty schemes, or discounts for being a member of professional organisations.

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Armed with these strategies and a bit of research, you stand a better chance of navigating the insurance landscape and finding a policy that provides both value and peace of mind.

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Frequently asked questions

Insurance Premium Tax (IPT) made its debut in 1994. The UK Government introduced this measure as a means to generate revenue from the insurance sector, which was otherwise exempt from Value Added Tax (VAT).

A few years later, in 1997, a higher rate of 17.5% was rolled out, targeting specific insurance policies. This rate particularly applied to policies offering breakdown cover, in addition to travel and product insurance. Subsequently, this rate was adjusted to match the prevailing VAT rate, settling at 20%.

While IPT bears some resemblance to VAT in its structure, they are distinct taxes. Both are calculated as a percentage of the total amount; for instance, if you have a car insurance premium of £500, with the standard rate of 12% IPT applied, the total cost would come to £560.

However, it’s essential to understand that IPT specifically targets insurance premiums, whereas VAT is a broader consumption tax applied to goods and services.

Insurance Premium Tax (IPT) has witnessed a series of hikes since its inception. Commencing at a modest 2.5% in 1994, the rate subsequently rose to 6% by 2015.

However, there was a swift increment to 9.5% in November 2015, followed by another jump to 10% in October 2016.

The current rate stands at 12%, illustrating that IPT has effectively doubled in just a short span of time.

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