Is There VAT on Car Insurance in the UK?

In the UK, car insurance is essential – and often costly. But many drivers wonder whether VAT is included in their insurance premium, or if another tax applies. The answer is that VAT is not charged on car insurance, but a separate tax called Insurance Premium Tax (IPT) is included in the cost.

This guide explains how VAT and IPT apply to car insurance, how they affect your premium, and what makes them different.

Is There VAT on Car Insurance?

No, car insurance is exempt from VAT in the UK. This means VAT (currently 20%) does not apply to the insurance premium itself. Insurance is classed as a VAT-exempt financial service, which means insurers do not charge VAT on the cost of cover and cannot reclaim VAT on related expenses.

Instead of VAT, the government applies a separate tax: Insurance Premium Tax.

What Is Insurance Premium Tax (IPT)?

Insurance Premium Tax is a tax specifically charged on most insurance policies in the UK, including car insurance. It is included in your premium and collected by the insurer, who then pays it to HMRC.

There are two IPT rates:

• Standard rate: 12% – applies to most general insurance, including car, home, and pet insurance

• Higher rate: 20% – applies to certain types of cover like travel insurance and appliance protection

Car insurance is taxed at the standard 12% IPT rate.

How Does IPT Affect My Car Insurance Premium?

When you receive a quote for car insurance, IPT is usually included in the final price. You won’t normally see it itemised unless requested, but it is part of what you pay.

For example:

• Car insurance base premium: £400

• IPT at 12%: £48

• Total premium: £448

The higher your base premium, the more you’ll pay in IPT. Although VAT isn’t charged, IPT still adds a significant cost.

What Are the Differences Between VAT and Insurance Premium Tax?

VAT

• Standard rate is 20%

• Charged on goods and services

• Businesses can reclaim VAT

• Applies to most industries

Insurance Premium Tax (IPT)

• Standard rate is 12%

• Charged on insurance premiums

• IPT cannot be reclaimed

• Applies specifically to insurance

IPT was introduced to ensure that the insurance sector contributed tax, without being subject to VAT. This distinction matters for accounting and for understanding why insurance premiums are structured differently from other purchases.

Are There Any Insurance Services Where VAT Might Apply?

While car insurance itself is exempt from VAT, some related services may attract VAT. For example:

• Broker fees charged separately from the premium

• Claims handling services provided by third parties

• Car repair bills, which may include VAT if you're billed directly

• Breakdown cover if sold as a standalone non-insurance service

If these are bundled within the insurance premium, they may fall under the same VAT exemption. If billed separately, VAT could apply.

Final Thoughts

Car insurance in the UK is exempt from VAT, but it is subject to Insurance Premium Tax, which is currently charged at 12%. While IPT increases your overall premium, it is not the same as VAT and cannot be reclaimed by businesses or individuals.

Understanding the tax treatment of your car insurance helps explain your premium and what’s included. If you’re ever unsure about the breakdown of your policy cost, ask your insurer or broker to provide a full summary of charges.