The Insurance Premium Tax (IPT) was introduced by the then Chancellor, Kenneth Clarke, in his November 1993 Budget and was enshrined in the 1994 Finance Act. It was seen as a way of raising revenue from the insurance industry, which at that time was viewed as being under-taxed. Managed by HMRC, it started as a single rate of 2.5% in 1994.
Since then, it has steadily increased, and today there are two different premium rates in operation in the UK – a standard rate of 10% which applies to most general insurance policies, including motor policies, and a higher rate of 20% which applies to travel insurance.
The standard rate is due to rise to 12% from 1 June 2017. Given that IPT was only 6% back in 2015, this represents a doubling of the rate in less than two years. However, in European terms, the IPT rate is still lower than that applied in Finland, Italy, the Netherlands, Germany and Greece.
What changes on 1 June 2017?
Following the announcement made in last November’s Budget, from 1 June 2017, the standard rate of IPT will be 12%, the higher rate will remain unchanged at 20%. This means that new business or renewals effective on or after 1 June 2017 will be liable to the new rate of 12%.
What about Mid-Term Adjustments (MTAs), Additional Premiums and Refunded Premiums?
The rate of IPT to be paid is based on the effective date of the MTA and the process date. MTAs and declaration adjustments resulting in additional premiums which relate to a period of insurance before 1 June 2017 will be subject to the old IPT rate of 10%; those resulting in additional premiums relating to a period of insurance after 1 June 2017 will be subject to the new IPT rate of 12%.
Where MTAs result in refund premiums that relate to a period of insurance effective prior to 1 June 2017, the IPT rate is the rate applicable for that period of insurance. Where MTAs result in refund premiums that relate to a period of insurance which is effective on or after 1 June 2017, then the rate applicable is the new rate of 12%.
How long is the transitional period?
The transitional period allows insurers to write business for policies that have been incepted and renewed at the old rate, provided that it is processed by a set date. In the past, the transitional period has been limited to two or three months, however this time it has been extended.
To ensure that eligible premiums can be processed at the 10% rate, adjustments and declarations will need to be made by 31st March 2018 in the case of scheme products, or 31 May 2018 in the case of non-scheme products.
In order to make sure customers are treated fairly, please make sure that they understand how IPT will be applied to their policies under the different scenarios outlined above.
Where to get further information
If you have any queries, or are unsure what level of IPT applies to a policy, then please contact us on 0345 345 0777, we will be happy to help.