Insurance premium tax (IPT) is set to rise to 9.5% from 1 November 2015, George Osborne has announced in the Summer Budget.
IPT, which is a tax on general insurance premiums, is currently levied at 6%. The last IPT rise took effect in January 2011 and was significantly smaller with an increment of just 1%. Although payable by insurers, it is widely anticipated that the increase in IPT will be passed on to policyholders causing premiums to rise.
The confirmed hike represents a tax increase of over 50% and has been criticised by various insurance associations for making it more expensive for the public and businesses alike to obtain insurance coverage. Policyholders should now anticipate paying more for general insurance, such as buildings and contents, motor and private medical insurance. It is not just consumers that will be affected, however, businesses will be squeezed too, as the hike will apply equally to corporate insurance premiums. Companies are therefore likely to see premiums for policies such as D&O, EL, PI and PL rise.
The Chancellor justified the change by reference to other countries which have a much higher IPT rate than the UK. He told the Commons “With these measures I am putting in place an approach for taxing banks and insurers over this Parliament which is sustainable, stable and fair.”
However, the Industry does not appear to agree with Mr Osborne. It is almost inevitable that additional charges payable by insurers will be passed on to policyholders. IPT has been described by Huw Evans, director of the Association of British Insurers (ABI) as “a tax on people and businesses at the point at which they buy a general insurance product”.
There has been widespread discontent with the decision to raise IPT. Steve White, CEO of the British Insurance Brokers’ Association (Biba), said his organisation was “extremely disappointed” by the so-called “stealth tax” which is expected to have a large scale effect on both consumers and businesses. After hearing the announcement, Biba’s executive director Graeme Trudgill tweeted that the rise “makes a mockery of the insurance growth action plan and efforts to reduce cost of motor insurance”.
There is a concern that the higher premiums will mean that individuals and businesses seeking to reduce costs will look to make cuts to their insurance cover. However, the Association of Insurance and Risk Managers in Industry and Commerce (Airmic) has warned against this. Julia Graham, technical director of Airmic, has emphasised the importance of having an effective insurance programme and warned that “cutting corners is a false economy”.
Whilst it is hoped that the Government will review the IPT rise and correct it in further budgets, insurers have at least been given a brief respite to implement the IPT increase. Following representation by the ABI to HMRC and Treasury officials, firms struggling to provide accurate IPT returns can now discuss with HMRC the possibility of providing estimated returns for initial accounting periods instead.
It is hoped that this temporary relaxation should help ease the transition of what is considered to be the most significant increase in the standard rate of IPT since its introduction in 1996.