What Is Insurance Premium Tax?

Insurance Premium Tax (IPT) is a tax levied by the UK government on most insurance policies. Unlike VAT, IPT is applied specifically to insurance premiums to generate revenue without directly taxing consumers. The tax is included in the cost of your insurance policy and is collected by insurers on behalf of HMRC.

This guide explains how IPT is calculated, why it exists, how it has changed over time, and ways to reduce its impact on your insurance costs.

How Is IPT Calculated?

Insurance Premium Tax is calculated as a percentage of your insurance premium and is automatically included in your policy cost. There are two IPT rates:

• Standard Rate: 12% – Applied to most types of insurance, including car, home, pet, and private medical insurance.

• Higher Rate: 20% – Applied to travel insurance, mechanical breakdown insurance, and certain vehicle insurance policies.

Example of IPT Calculation

If your car insurance premium is £500, the IPT at 12% would add an extra £60, making the total cost £560.

For travel insurance costing £200, the IPT at 20% would add £40, making the total £240.

How Has IPT Increased Over the Years?

IPT has risen significantly since its introduction in 1994, when it was originally 2.5%. Over the years, the government has increased IPT rates to boost revenue.

Year: 1994

• Standard Rate IPT: 2.5%

• Higher Rate IPT: 17.5%

Year: 1997

• Standard Rate IPT: 4%

• Higher Rate IPT: 17.5%

Year: 1999

• Standard Rate IPT: 5%

• Higher Rate IPT: 17.5%

Year: 2011

• Standard Rate IPT: 6%

• Higher Rate IPT: 20%

Year: 2015

• Standard Rate IPT: 9.5%

• Higher Rate IPT: 20%

Year: 2016

• Standard Rate IPT: 10%

• Higher Rate IPT: 20%

Year: 2017

• Standard Rate IPT: 12%

• Higher Rate IPT: 20%

The standard rate of 12% is now significantly higher than in previous years, increasing the cost of essential insurance policies for consumers.

Why Do You Need to Pay IPT?

The government uses IPT as a way to tax insurance policies without applying VAT. Since VAT does not apply to insurance, IPT ensures that insurers contribute to public revenue. The tax is collected by insurance providers and passed on to HMRC.

Critics argue that increasing IPT discourages people from taking out essential insurance, such as health and home cover, leading to higher costs in other sectors, like the NHS.

Are There Any Exemptions from IPT?

Certain insurance policies are exempt from IPT, meaning they are not subject to the standard or higher rate tax. These include:

• Life insurance

• Permanent health insurance (covering long-term disabilities)

• Reinsurance (insurance for insurance companies)

• Most export-related insurance policies

These exemptions encourage long-term financial security and support for essential health cover.

How Can I Reduce the Amount of IPT I Have to Pay?

While you cannot avoid IPT on taxable policies, there are ways to reduce your overall insurance costs:

1. Compare Insurance Providers – Shopping around for the best deals helps offset the cost of IPT.

2. Increase Your Excess – Raising your voluntary excess can lower premiums, reducing the IPT added to your policy.

3. Pay Annually Instead of Monthly – Some insurers charge extra fees for monthly payments, increasing your total IPT liability.

4. Consider Multi-Policy Discounts – Some providers offer discounts if you bundle policies, such as car and home insurance.

5. Use Employer Benefits – Some employers offer health insurance as a workplace benefit, which may not attract IPT.

By reducing the overall cost of insurance, you minimise the impact of IPT on your premiums.

Final Thoughts

Insurance Premium Tax is an unavoidable tax on most insurance policies in the UK, adding 12% or 20% to premiums depending on the type of cover. While you cannot opt out of IPT, you can reduce its impact by choosing competitive policies, increasing excesses, and paying annually instead of monthly.

To check whether IPT applies to your policy, review your insurance documents or ask your provider for a cost breakdown.