Is There VAT on Insurance?

When it comes to buying insurance in the UK, one of the most common questions people ask is whether VAT applies to their premiums. The answer isn’t as straightforward as it might seem, because while insurance itself is exempt from VAT, there are other taxes and charges to consider.

This guide explains how VAT applies to insurance, what Insurance Premium Tax is, and when VAT might apply to related services like warranties, add-ons, or administration fees.

Do You Pay VAT on Insurance in the UK?

No, VAT is not charged on insurance premiums in the UK. Insurance is classed as a VAT-exempt financial service. This applies to most types of insurance including:

• Car insurance

• Home and contents insurance

• Life insurance

• Travel insurance

• Business insurance

Instead of VAT, insurance is subject to a separate tax known as Insurance Premium Tax (IPT), which is added to the cost of your premium.

What Is Insurance Premium Tax (IPT)?

IPT is a tax specifically designed to apply to insurance policies. It’s charged by insurers and included in your total premium.

There are two rates:

• Standard rate: 12% – applies to most general insurance policies like home, motor and business insurance

• Higher rate: 20% – applies to travel insurance, mechanical or electrical appliance insurance, and certain vehicle-related policies

IPT is included in your premium and not usually shown separately unless requested. You do not pay this tax yourself – your insurer collects it and sends it to HMRC.

VAT on Guarantees and Warranties

While insurance premiums are exempt from VAT, extended warranties and guarantees may not be. If you buy a warranty from a retailer for a household appliance or electronic device, it may be subject to VAT if it does not fall under regulated insurance.

The VAT treatment depends on how the product is structured:

• If the warranty is considered an insurance contract, it will be exempt from VAT but subject to IPT

• If it is not insurance-based and sold as a service or contractual guarantee, it may be subject to standard rate VAT (20%)

Always check the wording of the policy or ask the provider whether VAT or IPT applies.

VAT on Insurance-Related Services

While insurance premiums themselves are VAT-exempt, some related services can be subject to VAT, such as:

• Claims handling by third-party firms

• Broker or admin fees charged separately

• Insurance consultancy or advice services

• Vehicle breakdown cover if sold as a non-insurance service

For example, if a broker charges a policy setup fee or cancellation charge, this may attract VAT. These fees are considered administrative or professional services rather than part of the actual insurance cover.

If you’re a VAT-registered business, this distinction matters, as VAT on these fees may be reclaimable, while IPT is not.

When to Seek Advice

If you are a business or professional dealing with multiple insurance-related costs, it’s worth getting advice from an accountant or VAT specialist to ensure you’re treating these charges correctly. This is particularly relevant if you operate in sectors like construction, logistics, or healthcare, where insurance services are frequent and varied.

Also consider seeking guidance if you sell extended warranties, package cover with other services, or need to structure contracts in a tax-efficient way.

Final Thoughts

In the UK, insurance premiums are exempt from VAT, but they are subject to Insurance Premium Tax instead. While IPT increases the cost of insurance, it is not the same as VAT and cannot be reclaimed by businesses.

However, related services and fees may attract VAT, especially when sold separately or when the service doesn’t meet the criteria of an insurance contract.

Always review your insurance documentation carefully and speak to a professional if you’re unsure how a fee or service is taxed. Understanding the difference between VAT and IPT can help avoid confusion and ensure you're not overpaying or misreporting tax.