What is insurance premium tax?

Ever wonder why your insurance premiums are so expensive, and what’s included in the charges? The answer could partially lie with Insurance Premium Tax (IPT). IPT is a tax on general insurance premiums and applies to all types of insurance, including car insurance. IPT is an indirect tax levied on insurance providers, but many insurers pass on the cost to customers in the form of higher premiums.

IPT was introduced in 1994 and is a tax paid on all types of insurance, including home insurance, pet insurance, travel insurance and car insurance. 

IPT creates revenue for the UK government. When customers pay their insurance premiums, insurance providers pass on the tax collected on the premiums directly to the government.

When you compare car insurance quotes, most will automatically include the correct rate of IPT, which means the quote you’re given already factors in this cost.

There are currently two different IPT rates. The standard rate is 12 per cent, while a higher rate of 20 per cent applies to travel insurance, mechanical and electrical appliances insurance and some types of car insurance. 

This higher rate will apply to car insurance if you’re buying a new car from a dealership and insuring it through the same business, so make sure you check with the dealership if you’re thinking of doing this. If you buy your car insurance through a different company, the standard 12 per cent rate will apply. 

You’ll pay IPT on most types of car insurance. Disabled drivers who lease their cars through a Motability Scheme are exempt. 

In addition, IPT does not apply to:

• Life insurance and permanent health insurance
• Mortgage insurance
• Commercial ships and aircraft insurance 
• Commercial goods in transit insurance
• Reinsurance

IPT is set by the UK government. It is calculated as a percentage of your individual premium. This means that the higher your premium cost, the more tax you’ll pay. As an example, if your annual car insurance premium is £400, your total cost will be £448 when factoring an IPT rate of 12 per cent or £480 at the higher rate of 20 per cent. If your premium cost is £500, it will be £560 with an IPT rate of 12 per cent or £600 with a rate of 20 per cent.

IPT was introduced in October 1994, and the standard rate has increased from 2.5 per cent to its current level of 12 per cent. IPT levels are set in the government’s budget, and rates have changed to keep up with industry developments and reduce the risk of tax avoidance and evasion. 

The higher rate of IPT was introduced in April 1997 at 17.5 per cent and increased to its current rate of 20 per cent in January 2011. This higher rate was introduced to address VAT avoidance, where businesses selling insurance with other goods had been able to artificially reduce the price of a product but inflate the cost of the insurance, allowing them to benefit from a lower tax rate. 

Modelling by the Association of British Insurers (ABI) shows that the cost of IPT in 2020/21 was equivalent to around £220 per household. What’s more, HMRC figures show that between 2011/12 and 2021/22, the amount of tax revenue raised from IPT more than doubled, increasing from £2.9 billion to £6.6 billion. 

Unfortunately, there’s nothing drivers can do about IPT. And whatever you do, don’t be tempted to drive without car insurance in place. If you’re caught driving a car that’s not insured, you could be given a fixed penalty plus points on your licence. If the case goes to court, you could be given an unlimited fine and even be disqualified from driving. 

However, there are steps you can take to help reduce the cost of your overall car insurance premiums. These include:

• Shopping around for cover: Using a price comparison website can help you to easily compare quotes from a range of insurers and find the best deal
• Avoiding modifications: Insurers don’t like modifications, such as tinted windows and spoilers, and you’ll pay a higher premium if you have them
• Parking your car on a driveway or in a garage: If you leave your car on the street each night, you’ll likely pay more for cover, as it’s at a higher risk of theft or damage
• Reducing your mileage: Reducing how much you drive can reduce the likelihood of an accident, which means the cost of your premiums will be lower
• Increasing your excess: The excess is the amount you need to pay towards the cost of an insurance claim. This is made up of a compulsory excess set by the insurer and a voluntary excess, which you choose. The higher your voluntary excess, the lower your premiums will be, but make sure the excess is still affordable
• Improving your car’s security: Adding an industry-approved immobiliser or tracker to your car can help lower your premiums, as there’s less chance of your car being stolen
• Choose a car in a lower insurance group: All cars are sorted into one of 50 insurance groups, with those at the lower end being cheaper to insure