Last week we saw Chancellor of the Exchequer, George Osborne leave 11 Downing Street, presenting the United Kingdom with his red ministerial box to deliver us with the 2016 budget. In his budget speech, the Chancellor outlined how the government will spend the country’s money this year and also the changes that the government will be making to taxes in the coming years.
The one particular tax that we were most interested to hear about as an insurance broker was IPT, which has been increased by 0.5% to reach 10%, with effect from the 1st October 2016.
So what is IPT and why do we have to pay it?
IPT stands for Insurance Premium Tax and as you might have guessed from its name, it is a tax that we all have to pay on our insurance premiums. It was first introduced to the UK in the 1993 Budget by the Chancellor at the time, Kenneth Clarke and came into play in 1994 as a way to raise revenue from the insurance sector. Up until this point, there was no tax on insurance premiums at all because any premiums and associated transactions by insurance agents or brokers such as ourselves were and still are to this day, exempt from Value Added Tax or VAT as it is more commonly known.
There are two rates of Insurance Premium Tax: Standard rate and Higher rate. Most premiums qualify for the Standard rate, but some more specific premiums such as travel insurance and warranties for some electrical and mechanical goods fall under the Higher rate. All insurance premiums are subject to IPT unless they are specifically exempt.
How has IPT increased over the years?
When we first started having to pay IPT at the standard rate in 1994, we had to pay another 2.5% of our insurance premium to the government as tax for taking out our insurance policies.
This increased to 4% in 1997, 5% in 1999, 6% in 2011 and last November (2015) we saw it rise further still to reach 9.5%.
The 2016 Budget revealed another increase, meaning that we now have to pay 10% Insurance Premium Tax at the standard rate.
What is the Insurance Premium Tax increase going to be spent on?
In this particular budget, George Osborne outlined how he plans to utilise the extra half a percent increase to Insurance Premium Tax to help boost flood defenses in the UK. This is a potential extra £700 million to prevent a re-occurrence of the widespread damage seen in the north of England and in Scotland as a result of recent storms.