Briefing Paper: Potential Insurance Premium Tax (IPT) Increase – What You Need to Know

Introduction to Insurance Premium Tax (IPT)

IPT was introduced by the UK government on 1 October 1994 as a tax on general insurance premiums, serving as a tool to generate additional revenue without increasing income tax or National Insurance contributions. Since its inception, IPT has been levied on most forms of general insurance, for both businesses and households. Certain types of insurance remain exempt such as life insurance and the insurance for exported goods.

History of IPT Rate Changes

Over the years, the IPT rate has increased periodically. Below is a brief overview of its evolution:

• 1994: Introduced at a rate of 2.5%.
• 1997: Increased to 4%, with a higher rate of 17.5% applied to certain types of insurance (e.g., travel insurance).
• 1999: Further increased to 5%.
• 2011: Raised to 6% as part of government austerity measures.
• 2015: Significant increase to 9.5%.
• 2016: Further increased to 10% in October, followed by the most recent increase in 2017, bringing the rate to 12%, where it currently stands.

Current IPT Structure

There are two main IPT rates:

• Standard rate: 12% (applied to most insurance policies).
• Higher rate: 20% (applied to specific insurance types, such as travel insurance and insurance purchased alongside some goods).

What Could a Rate Increase Mean for Companies?

There are growing signs that the government may raise the IPT rate in the next budget. Based on previous trends, we could see the rate increase to 13-15%. Some commentators are predicting an even higher rate increase to between 15% and 20%. Such an increase could have significant implications for businesses, the key ones being:

• Higher Premiums: For businesses and households alike, an increase in IPT would result in higher insurance costs across the board.
• Higher Broker Fees: For those with broker fees that are based on a percentage of their insurance premium then an increase in IPT will automatically lead to an increase in broker fees.
• Higher Rental Costs: Businesses that rely on rented properties may see the increased insurance costs to landlords passed through directly.
• Increased Risks from Suppliers: As suppliers manage the implications of increased insurance premiums, they may pass this to the end customers or reduce their insurance purchases to limit costs. From an operational risk management perspective ensuring key suppliers maintain adequate insurance is a key activity.
• Increased Business Costs: For businesses, the cost of insuring assets, employees, and operations would rise. Small and medium-sized enterprises (SMEs) may feel this impact more acutely, as they rely on affordable insurance to manage operational risks.
• Reduced Insurance Uptake: Higher insurance premiums could deter individuals and businesses from taking out or renewing non-essential policies, potentially leaving them exposed to greater risks.
• Broader Economic Impact: Rising IPT could also impact industries reliant on insurance, such as brokers and insurers, by reducing demand for insurance products. Additionally, businesses facing higher insurance costs may pass these increases on to consumers, contributing to inflation.

In addition to these implications, organisations may feel compelled to review how they finance risk to combat the impact of IPT, for example by considering greater self insurance to reduce premiums and the potential to utilise alternative risk financing methods, such as captive insurance companies.

JPIC Group’s Recommendations

In anticipation of a possible IPT rate increase, JPIC Group advises the following steps to help mitigate potential cost impacts:

• Review Insurance Policies: Now is an ideal time to review and renew existing insurance policies before a rate change takes effect. Locking in current rates could protect you from immediate increases.
• Review Variable Premium Arrangements: Consider the implications of an increase in IPT to Minimum & Deposit premium arrangements for example.
• Review your insurance broker relationship – could a fixed fee basis be more beneficial than commission as a percentage of premiums?
• Assess Risk Management Strategies: Consider reviewing your risk management strategies to minimise reliance on insurance where possible. This might include implementing additional safeguards or strategies to lower your risk profile, which in turn could reduce premium costs.
• Consider different risk financing structures: Investigate how risk is financed and consider whether restructuring insurance to reduce upfront premiums could help to save cost over time.
• Plan for Increased Costs: Ensure your business is prepared for higher insurance costs by factoring these into your budgeting and financial planning.

Conclusion

With the current economic climate and government revenue needs, an IPT increase is a very real possibility.

JPIC Group will continue to provide timely updates and personalised advice to ensure our clients are fully prepared to manage the impact of any future IPT rate increases.

Should you have any questions or require assistance in reviewing your insurance policies or risk finance and management strategies, please do not hesitate to reach out to your JPIC contact.