- Insurance premium tax was ignored in the Budget and will keep raking in billions
A little-known insurance stealth tax is set to raise £46billion for the Government over the next five years – more than road tax.
Insurance premium tax (IPT) adds 12 per cent to the price of car, home and pet insurance, and 20 per cent on travel insurance and many forms of add-on cover.
IPT is one of the least well-known taxes in Britain, with 67 per cent of adults having no idea what it is, according to the Association of British Insurers.
Despite the lack of knowledge surrounding it, IPT is fast becoming one of the most expensive stealth taxes.
On the up: IPT is now a comparable tax to household names like road and inheritance taxes
IPT will rake in £46billion from this financial year to 2030, according to forecasts from the Office for Budget Responsibility (OBR).
That is up 40 per cent on the £32.9billion paid in the previous five years, and an increase of 132 per cent on the five years before that (£19.8billion).
Not only that, but the amount of money insurers are forecast to pay in IPT has been increased.
The OBR predicted IPT will rake in £42.4billion over the next five years at the time of the 2024 spring Budget, but has now upgraded that to £46billion.
IPT is levied directly onto insurers, who then typically pass the bulk of the cost onto households taking out the product.
The level of IPT has come under fire from groups including the ABI and the British Insurance Brokers’ Association, who called on chancellor Rachel Reeves to lower the tax in her latest Budget, which she did not do.
By 2030, IPT will rake in more than well-known taxes such as tobacco duty, road tax and air passenger duty, and almost as much as alcohol duty and inheritance tax.
But unlike the ‘sin’ taxes mentioned above, IPT is a tax on doing the right thing – being responsible and buying insurance.
IPT contributes to higher car insurance prices for many and has a direct link to the number of uninsured drivers, according to the Motor Insurers’ Bureau.
The current high level of IPT is due to the cost of insurance soaring. Car insurance is the main culprit, with the average premium now £622 a year, up 48 per cent in two years.
Because IPT is worked out as a proportion of a total premium, as premiums rise then IPT rises in lockstep.
This can clearly be seen in government figures, which show that IPT receipts stayed fairly flat between 2018/19 and 2021/22, rising from just £6.2billion a year to £6.6billion.
But as car insurance premiums began rising in early 2022, so too did the level of IPT paid, which rose sharply to £7.3billion in 2022/23 and £8.4billion in 2023/24.
Brett Hill, head of health & protection at financial consultancy Broadstone, said: ‘While it is positive that the IPT rate was not raised by the Chancellor, as speculated, she can nonetheless look forward to IPT providing a £3.53billion boost in Treasury revenue over the next five years.
‘Rising premiums are having a serious impact on the affordability of essential insurance products across the board, from motor insurance to home coverage, hitting consumers hard.
‘The picture is even more concerning when it comes to health insurance, where premiums are rising due to high claims and other inflationary pressures leaving some customers struggling to afford their renewal premiums.’
While IPT technically a tax on insurers, in practice the tax is applied to the ‘true’ cost of insurance and then passed on to consumers in the form of higher premiums.
The only cover where IPT is not charged is life insurance and some forms of health insurance.
The rises are down to moves made by the Conservative government between January 2011 and June 2017. During that time, the rate of IPT grew from 5 per cent to 12 per cent.
Before that, the rate was unchanged at 5 per cent between 1999 and 2011.
The Treasury has been approached for comment.