Insurance Premium Tax (IPT) – covering most general insurance – has increased substantially since its inception in 1994. In particular, since 2011 IPT has climbed rapidly as policymakers have sought additional revenue to reduce the deficit in the public finances. At present the standard rate of IPT stands at 12%, about five times its initial rate of 2.5%.
IPT now raises more revenue than beer & cider duties, wine duties and spirits duties. It is set to raise more revenue than inheritance tax over the next three years, according to Office for Budget Responsibility projections. Since 1994 the standard rate of IPT has increased more rapidly than tobacco duty.
Such large hikes in IPT have taken place despite a lack of published evidence around its impact on consumer behaviour and household finances, especially with respect to the distributional consequences of changes in IPT. This Social Market Foundation report presents new analysis into the impact of IPT on households and shows that:
- The amount of revenue raised from IPT in the 2016/17 financial year was equal to
£179 for every British household.
- About half of this is paid directly by households on insurance products, with the remainder paid by businesses. Business costs associated with IPT are likely, at least in part, to feed through into the finances of UK households – through higher consumer prices, lower dividends and reduced profits for business owners.
- Forecasts suggest that the per-household annual costs of IPT are set to increase and rise above £200 from 2018.
- If the standard rate of IPT had remained at 5%, its rate prior to 2011, then the savings per UK household could be significant. For the current fiscal year, 2017/18, we estimate that households are directly paying about £50 per year more as a result of higher IPT. If the business costs associated with higher IPT are ultimately borne by households, then the per household cost could be as high as £105.
- To put this into context, costs of over £100 associated with higher IPT could, for a typical income taxpaying worker, offset the financial benefits of the April 2017 increase in personal allowances from £11,000 to £11,500.
- IPT is a regressive form of taxation; lower income households spend a greater proportion of their disposable income on insurance (excluding IPT-exempt life insurance) than the richest households.
Survey research undertaken as part of this study suggest a widespread lack of awareness of IPT’s existence or the extent to which it has changed in recent years. About half of the 2,000 adults surveyed were unaware of the existence of IPT before taking part in the survey – notably higher than the other taxes and duties we asked them about. IPT might therefore be described a “stealth tax”, a term that captures public cynicism about the honesty and transparency of the tax system.
The regressive nature of IPT, lack of awareness of the tax and the fact that it has increased significantly should be key considerations for policymakers making decisions on this form of taxation. As the Institute for Fiscal Studies has noted, recent increases in IPT have been made by government without deep consideration of what the economically optimal rate of the tax should be. The IFS has suggested that a low single-digit rate for consumers would be appropriate, suggesting that the current rate of 12% is excessive.