HMRC has doubled its tax on a levy many people don’t even know they’re paying, analysis has revealed.
Insurance premium tax (IPT) costs have topped £7bn for the first time this year, according to UHY Hacker Young.
The accountancy firm’s calculations show that costs have risen by 124 per cent in just ten years, from £3.1 billion in 2012.
Policyholders pay tax, which has risen from 2.5 percent to up to 20 percent over the past 30 years, on products such as travel and car insurance.
Laura Suter of investment platform AJ Bell said: “Most people will not know about tax on insurance premiums, but this a little known tax it now generates more than twice as much money as inheritance tax and is paid by almost every household in the UK.”
Insurance premium tax (IPT) is payable on almost all insurance policies, with a few exceptions – such as whole life insurance and mortgage insurance. Many people are not aware of this because it is related to the premium paid to the policyholder.
Richard Lloyd-Warne of UHY Hacker Young attributed the large increase in income to IPT growth of insurance policies.
He said: “The amount of insurance that people take out has increased dramatically in recent years – pet insurance and mobile phone insurance are just a few examples. All these new policies mean even more revenue for taxpayers.”
There have also been successive increases in IPT rates since they were first introduced, which has also increased its cost.
When IPT was introduced in 1994 as a way for the government to tax the insurance industry – as insurance premiums are not subject to VAT – the standard rate was just 2.5%. This year the IPT raised just £117m for the taxpayer.
But successive increases mean it now stands at 12 percent. A higher rate of 20 percent applies to travel insurance, insurance of mechanical or electrical devices and certain vehicle insurances.
At the higher rate, for someone paying a car insurance premium of £700 (minus service charges), £140 of that cost would go towards IPT.
Rising inflation and an increase in insurance costs according to Ms Suter, who said “with inflation rising dramatically this year, these numbers will jump again for the current tax year”.
Mr Lloyd-Warne said the tax was an “invisible cost of living burden”. He said: “Households are being hit with the double whammy of paying insurance and tax on top – all at a time when budgets are already stretched to the limit.”
Ms Suter said: “Unfortunately there is no way around this tax, it is automatically added to insurance contracts – the only way to reduce it is to reduce the cost of insurance. Ways to do this include paying the cost up front instead of monthly, or increasing your voluntary excess, although this could cost you more if you claim.’