Budget: Insurance Premium tax increases from 6% to 9.5%


Increasing the basic rate of IPT from 6% to 9.5% will clearly not be welcomed by insurers. It will add over £12 to the average buildings and contents policy and over £13 to the average annual motor insurance bill.

Insurers will also be concerned about whether this represents part of a gradual move towards aligning the IPT rate with the VAT rate, something we have already seen in other EU member states.

On a more positive note, the announcement of transitional provisions around the rate rise should allow insurers to manage the change with less difficulty than in 2011. Insurers' concerns around the way that change was implemented have been recognised today.

The increase in IPT will affect many benefits offered by employers, either on a company-paid basis or on the benefits they offer employees on a voluntary basis.

The benefit that will be impacted the most is private medical insurance.  The average private medical insurance premium is around £550, whilst medical inflation for corporate schemes is around 4% a year compared to the small company market which can attract increases of between 10%  and 12%.  This will result in private medical premiums increasing by between 7.5% and 15.5% a year. It will also impact employees' taxable benefit, as IPT is included in an employee's overall P11D liability.

An employee earning £20k a year may find they face an increase in their P11D liability of between £9 and £18 a year - an increase from £110 to £127 a year. 

An increase in premiums due to an increase in IPT may result in some individuals and companies unable to afford private medical cover, increasing pressure on the NHS.

The increase will have a significant impact on flexible benefit schemes, where rates will either have to change mid-year or companies will have to finance the increase until the next renewal.